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Luncheon Speech to the
European Gold Mining Investment Forum 1997
Geneva, Switzerland
I was a bit shocked when Michele asked me to
speak at this conference. Shock turned to horror when I realised that my
audience had been given Hobson's choice -- listen or no lunch! I hope the
invitation did not deter too many potential attendees because my views on certain aspects of the gold industry are
well known and not much loved by many of you. Furthermore, I run the
risk that if I speak my mind, I may be accused of biting the hand that has
just fed me. I can't believe there are many people here who can stomach the
thought of sitting through even a variation of my usual theme. I therefore
promise to be brief - the greatest quality in any speaker.
So here we are, yet again, going through one
of those seemingly endless periods of penury which have been the lot of gold
miners since time immemorial. Before we can once again enjoy the fruits of
our labours on a sustainable basis, we have got to move heaven and earth to
get gold out of the hands of those who do not want to own it and into the
hands of those that do. I hope it won't spoil your lunch when I tell you that
in order to achieve this, we need a lower gold
price!
Last year I visited India for the first time,
and I asked my taxi driver how much gold Indians gave as a dowry. His reply
was as interesting as it was unexpected: "As
much as we can afford." Obviously, the lower the price, the more
gold they can afford. Since India is already the largest consumer of gold in
the world, we must all pray for that country's continued
and growing prosperity, because if our prayers are answered, they will
be able to afford more of it. We, in this room, must continue to play our
part in encouraging consumption by doing all we can to depress the gold
price. No one should underestimate what we have already achieved in this
regard. We have done much already, but we must do more!
Our efforts to make gold more affordable have
already born fruit. The low price has resulted in some 800 tonnes more gold being consumed than the gold
miners can produce each year. The trouble is that if we go on as we
are, it will still take more than a generation for the Central Bank's stocks
to be depleted and for the laws of supply and demand to reassert themselves.
Most of us cannot wait that long! We have got to try harder!
If we want to encourage the transfer of gold
from those who wish to dispose of it to those who wish to acquire it, we must
at all costs avoid a repeat of the state of affairs which existed in the late
1970s and early 1980s. In those days, when the purchasing power of gold
reached unprecedented levels, we never read about Central Banks lending or
selling their gold. Mining companies did not sell forward for fear of the
price going higher. Now they are selling forward for fear of the price going
lower! A self-fulfilling policy if ever
they was one. But what really helps to keep the gold
price affordable is the powerful message that the producers broadcast about
their own perceptions as to the direction of the price. No one in his right
mind would sell gold forward if he thought the gold price was going to rise.
Investors in gold and gold shares have received that message, loud and clear,
and have acted accordingly.
If we want
to keep the gold price low, the last thing
we must do is to encourage investors to buy it. Investors, as well all know,
are nervous creatures who hate buying things that are freely offered; they
much prefer to buy into a shortage. At the risk of seeming sexist, I should
point out that this preference is largely a male preserve. Men seem to think
that if something is cheap, there must be something wrong with it. Women, on
the other hand, think if something is cheap it might be a bargain. In the
later 1970s, when gold was expensive, it was hard to find an investor who did
not have some gold in his portfolio. Nowadays it is hard to find one who
admits having any. But women can't get enough of it. The World Gold Council
did a survey once and what do you think they found? The women who want more
gold most are the women who have most gold!
One of the best ways of discouraging people
from investing in gold is to hold conferences like this. These conferences
give the gold industry an excellent platform from which to blazon to the
world their aggressive expansion plans. The raison d'être for these
conferences is that they give the producers an opportunity -- which they are
actually willing to pay for -- to impart the message to prospective investors
that gold mining is a growth industry whose glittering prospects are based on
a massive expansion of reserves, resources and production, past and future.
Needless to say, past performance is made to pale into insignificance
compared with what lies ahead. We fund managers are obliged to point out that
past performance is no guide to the future. In the interests of fair play
miners should be required to do the same! The fact that growth
in reserves and production have not, in the main, been accompanied by
a commensurate growth in earnings per share, is of no greater relevance than
the fact that the Emperor wore no clothes.
As you know, almost nobody noticed that the
Emperor was as naked as the day that he was born. But there is now reason to
believe that one or two eagle-eyed investors have spotted something which
frightens them. Rather than buying the shares of
the producers every time they hear about a company's growth potential,
investors now seem to be selling them. In other words, the message has not
changed, but the reaction to it has. The industry now finds itself in
something of a hole. The best advice for someone who finds himself in a hole
is to stop digging.
If we really believe that it is in the
long-term interests of the gold-mining industry to have the lowest possible
gold price in the short term, it obviously makes sense to tell everyone that
your mission is to produce more and more of a product which, judging from the
price, is already in over supply.
You must keep telling the world how much you
are spending on exploration and then that your
finding costs are less that $15/oz. They can work out for themselves how many
extra ounces the market is going to have to absorb in the future. No one ever
asks why, if it costs so little to find an ounce of gold, gold is not a base
metal like copper? All we know is that exploration expenditure has resulted
in a exponential growth of the four categories of
ounces, some of which are for real, others imagined. The categories are as
follows: Proven and Probable ounces, Possible
ounces, Blah-blah ounces and Yet-To-Be-Discovered ounces. Strange to
relate, Blah-Blah and Yet-To-Be Discovered ounces are often valued more
highly by the market than Proven and Probable ounces! If you doubt me, ask
the shareholders of BRE-X.
So to the producers I say, don't be shy about
publicising the sacrifices your shareholders are making, in order to achieve
the speedier transfer of gold from those who have it to those who want it. At the last gold conference I attended, I could not
restrain myself from asking one of the presenters whether he had perhaps
omitted one of his slides by mistake. He had shown a number of charts going
from the bottom left-hand corner of the page to the top right, demonstrating
the growth of his company's reserves and production. What was lacking was a
chart showing the corresponding growth in profitability and it was that chart
that I thought might have been mislaid. I think it is right that a wider audience should be told how painful it is to be
a shareholder in this industry and how much they are suffering for the
cause of lower gold prices. Shareholders themselves are only too well aware
of this.
I speak from the heart since it is mainly my
fault that Mercury Asset Management is one of the world's largest owners of
gold-mining shares. We call shareholders, shearholders,
at Mercury, because we are fond of the saying that if God had not intended
shareholders to be sheared, he would not have made them behave like sheep!
We have watched with interest how shareholders
have reacted to the announcement of forward sales by mining companies. You
would have thought that if such sales were as beneficial to shareholders as
the mining companies say they are, their shares
would go up every time a forward sale was announced. But that has not been
the case. Shareholders are clearly taking the view that in order to keep the
gold price down, forward sales are a necessary evil
which must be born with fortitude.
The same can be said about the reaction of
shareholders to mining company presentations. Presumably the presentations
are designed to achieve the expansion of the shareholder base and thus the
share price. They certainly used to achieve that end, but now for some reason
the same type of presentation seems to be having exactly the opposite effect.
I wonder whether those of you who are responsible for investor relations have
noticed this.
People keep asking me when they should start
buying gold shares again. Of course I don't know, but I have a pretty good
idea. We at Mercury have battled for reform in various parts of the mining
industry over a number of years, sometimes with a fair measure of success. The one battle which we have fought and decisively lost
has been our battle with the gold miners against forward sales. [ed.’s note:
please recall that this presentation by Mr. Baring was given in 1997. How
miner attitudes have changed! Or have they? All eyes remain on the mining
CFOs as the gold price rises.] Not only have we been seen off with our tails
between our legs, but with the advantage of hindsight, it is now clear to us
that the mining industry has been far more skillful
at predicting the trend of the gold price than we have, and to prove it, they
will tell us how much they have saved their shareholders by their actions.
In my experience, people buy gold shares with
a view to making as much money as possible rather than losing as little as
possible. In other words, they buy gold shares when they think the gold price
is going up. Since the miners have shown themselves to be so adept at
predicting the direction of the gold price, I simply advise people not to buy
gold shares until they see the gold-mining industry unwinding their forward
positions. That will be as good a sign as any I can think of that the pain we
are suffering is nearly over.
Having paid tribute to the gold
miners for their efforts to keep the gold price affordable, it would be
churlish not to acknowledge the contribution of the Central Banks to that
cause.
But for the Central Bank's willingness to lend
their gold to people who subsequently sell it, the price would probably be a
lot higher. Since Central Bank gold is valued in the books at a price which
bears no relation to reality, it does not matter to them what effect their
actions have on the price. Even if they decide to sell it at today's
depressed price, they still make a huge profit. [Ed's note: as of 1999,
this condition has fundamentally changed with the European Central Bank's
adoption of the practice of booking its gold reserves at prices which are
marked to market values quarterly.]
Personally I have never worried too much about
potential Central Bank sales. First, if history is anything to go by, the
timing of Central bank sales of gold is one of the best contrary indicators
you will get. Secondly, Mrs. Thatcher taught us that people are quite
prepared to buy what they already own if the price is attractive enough. The
prospect of a large seller is always conducive to achieving that.
Furthermore, the disposal of State assets gives rise to juicy commissions
which are the lifeblood of the larger financial institutions. Would it surprise you to hear that the major Swiss
Banks have already been in touch with the Governor of the Swiss Central Bank
to ask if they could be helpful over the proposed sale of the Swiss gold? It
certainly would not surprise me! It was not so many years ago that, as
a matter of policy, every Swiss-run portfolio contained 10% in gold. Faced
with having to find a home for Central Bank gold, don't be surprised if that
policy is revived. Once large institutions which have not previously been
actively involved in a market become involved, that in itself enlarges the
size and depth of the market.
There was a nasty moment a week or two ago
when the German Government was talking about valuing its gold at a price
which bore a more realistic relationship to the market price. This is the
last thing we want to see! [Ed's note: In keeping with the tenor of
this entire speech, please note the tongue firmly in cheek.]
If Central Bank gold was valued
at the market price it would discourage Central Bankers from dong things
which might adversely affect its value. We can now heave a sigh of relief that the uproar which was caused
by the proposed revaluation of the German Gold reserves will probably deter
other Governments from tinkering with theirs. No one seems to have noticed
that gold has been demonetised for over 20 years. What on earth is all the
fuss about! In fact the public's interest in gold reserves has suddenly been
aroused in a way that even the World Gold Council could never have
engineered.
And speaking of the World Gold Council, I
can't refrain from pointing out that the industry is paying more than $2/oz
to support an organisation, the sole purpose of which is to increase the
demand for gold. I thought we had decided that what was required was a lower
gold price, not a higher one! Perhaps this is why there are a number of major
producers which have decided not to belong to the World
Gold Council nor to support its efforts. But surely it is only fair
that those, who receive more than the market price by selling gold they have
not yet produced, should finance the organisation which has to find a buyer
for it. Those who do not depress the gold price by selling forward have
already done their bit and should therefore not be required to pay twice.
Sitting between the miners and the Central
Bankers are the Investment Banks. They facilitate the
process of lending gold from the Central Banks to the miners so that the
latter can sell it at lower and lower prices. It is, of course, in the
interest of the middle men to talk the price down. It encourages both the
lenders and sellers to act quickly before the price goes lower. They know
full well that a commission today is worth more than one tomorrow. There is
no contango on commissions!
Mining is a relatively harmless activity,
which gives gainful employment to a lot of people, often in remote areas.
Whether or not it is a profitable occupation does not seem to matter. Miners
are like moles -- they are not motivated by profit. They just like digging.
You can't stop them even though they may be approaching a mole trap.
Central Bankers may consider themselves more
sophisticated than miners. But by seeking to earn
a return, however small, on their gold reserves, they are helping to make gold more affordable.
It makes you wonder whether they ever consider foregoing
the income on a small portion of their reserves in the interests of enhancing the capital value of the
whole.
So, speaking on behalf of those billions of
people who live East of Suez, it remains for me to thank each and every one
of you who have contributed, to a greater or lesser extent, to making gold
more affordable. Speaking selfishly as a shareholder, I wish you would stop.
If you will, I will.
Thank you for your attention.
Julian Baring
June 10, 1997
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