-- Published: Wednesday, 21 May 2014 | Print | Disqus
Source: Kevin Michael Grace of The Gold Report
Pierre Lassonde revolutionized investing with the creation of the first gold royalty company. Three decades later, he is as confident in this model as ever, especially considering the difficulties of the majors in discovering large, high-grade reserves. In this interview with The Gold Report, this director and former chairman of the World Gold Council discusses the significance of the shift in gold ownership from West to East, the problem of mining scale and the results of the industry's failure to develop new prospecting technology.
The Gold Report: You wrote "The Gold Book: The Complete Investment Guide to Precious Metals" in 1990. What have been the biggest changes in gold investment since then?
Pierre Lassonde: The biggest change is the development of gold exchange-traded funds (ETFs). They began in 2004 and went from zero all the way up to over 2,650 tons of gold. Ownership is now down about one-third, but that's still about 1,750 tons of gold held by this instrument.
The next major change is the astounding decoupling of gold equities from the gold price. The latter went from $250 per ounce ($250/oz) in 2001 to just over $1,900/oz in 2011. In turn, the gold equities rose, but nowhere near the percentage the gold price did. This decoupling has hurt gold producers tremendously.
TGR: Some argue that ETFs are responsible for this decoupling because they allow people to invest in gold without buying physical bullion or gold mining shares. Do you agree?
PL: Not at all. In the 1970s, after the gold price went up, earnings and dividends went up, as did the shares of gold equities. The margin expansion that enabled this has disappeared. This is 90% of the reason gold equities have decoupled. It is a self-inflicted wound and nothing to do with gold ETFs.
TGR: When gold topped $1,900/oz in September 2011, many goldbugs believed that, based on macroeconomic considerations, the price would top $3,000/oz and beyond. Was that view wrong, overstated or ahead of its time?
PL: It was clearly wrong when we look at what happened. That view was based on the idea that the Federal Reserve was issuing so much paper that significant inflation would appear shortly, and that, in turn, would boost the gold price up and up and up. Three years later, we still don't see any inflation. What these people forgot is that the velocity of money fell tremendously in 2008 and has never really recovered. The money being created by the Fed is being sat on by the banks.
TGR: After the gold price collapsed last year, many quoted John Maynard Keynes' assessment of gold as a "barbarous relic." What do you make of that?
PL: Tell that to the Indians and the Chinese who last year bought over 2,800 tons in physical gold, mostly for jewelry and gifting. The last 10 years has seen a huge gold transfer from the West to the East. People in the West look at Western statistics and argue that the price of gold must collapse. They forget we are no longer the No. 1 market in gold in the world. Chindia is: China and India. Those are the No. 1 and No. 2 gold markets in the world.
Last year, we saw about 900 tons of gold come out of the ETFs. We saw 400 tons of gold come out of the COMEX. Goldman Sachs predicted that gold was going to $900/oz. But at $1,250/oz, the Chinese and the Indians stuck their hands out and said they would take it all. Gold then stabilized at $1,250/oz.
TGR: You're a director of the World Gold Council (WGC), which publishes research on global trends in the gold space. Which factors now control the price of gold? Where do you see its price going?
PL: As I mentioned, the largest gold markets are China and India. China has 300–500 million people entering the middle class, which has a huge affinity for gold. The situation in India is similar. So the Chinese and Indians will determine the gold price.
TGR: You said that you see the gold price going sideways. Short term or long term?
PL: Short term, I think. We're not seeing the kind of disgorgement from the ETFs and the COMEX that we had last year. Inventories are building up. In the short term, June and July are normally the two softest months of the year for the gold price. So we could retouch the lows of 2013.
Going into fall 2014 and 2015, gold will be sideways to up but not dramatically so until inflation returns, and the U.S. dollar is effectively devalued.
Asian demand for gold jewelry follows Economics 101. The higher the price, the less the demand; the lower the price, the greater the demand. So if gold goes to $1,800/oz, much demand will disappear, unless people are buying for financial reasons.
TGR: As we know, China is not the most transparent jurisdiction in the world. Do we know how much gold the Chinese government has now? Can we make a good guess?
PL: The only thing that we know for certain is that in 2009, the last time China reported its official central bank reserve to the International Monetary Fund, it had exactly 1,054 tonnes of gold. Many speculate that that number has increased since then. I would tend to agree, simply because we have seen a fairly big jump in the import statistics in the last couple of years.
We know that China is the largest gold producer in the world. It produces over 400 tons of gold, but that gold has to be sold to the central bank, which then sells it back to the jewelers. I think that two or three years ago, the central bank started to keep home-produced gold and began importing gold to sell to the jewelry market.
TGR: WGC figures suggest that personal gold buying in China will continue to increase over the next few years.
PL: Gold demand in China has been related to the growth in gross domestic product (GDP). For more than a decade, each 1% growth in GDP resulted in 1.5% growth in the gold market. Last year, however, the growth was more like 2% or 2.5%. Much of that gold ended up as collateral in back-to-back loans, commodity loans. So gold is being used as a financial instrument, as well as for jewelry.
TGR: Do you believe China seeks a dominant position in world bullion ownership?
PL: Three points: First, the Chinese authorities very much encourage private gold ownership, for instance in TV ads. Second, 10 years down the road, the Shanghai Gold Exchange (SGE) is likely to determine the gold price, not the COMEX. Third, I have maintained for quite a few years that when we reach the peak in this gold cycle, the SGE will resemble a casino. The Chinese have a huge propensity for gambling, and this is what will likely propel the gold price to levels that we probably can't even imagine.
TGR: Is the gold industry comparable to the oil industry, in that gold, like oil, has become ever more difficult and expensive to find and produce?
PL: The big difference between the two industries is the use of technology. The oil industry has done a much better job than the mining industry with research and development and creating new technology. Look at three-dimensional (3-D) seismic. The oil industry went from 9 dry holes out of 10 to 7 successes out of 10 because of 3-D technology. We have none of that in the mining business. We're still using the same technology we used 100 years ago.
The oil industry developed fracking, a new technology that opened up vast new basins of tight oil. Then there are the deep waters where they come up with huge discoveries. The oil industry still has an enormous amount of great oil coming at $15–20/barrel. When you consider a market price of $100, the margins are quite unbelievable. Similar results have eluded the mining industry, and that's why margins have not expanded. The gold price has risen 500%, but we still end up with $200/oz margins.
TGR: Do you think it's moving in a positive direction?
PL: I take a wait-and-see attitude. I'm a Doubting Thomas; you have to show me.
TGR: Do you think that the prices of the gold majors will be the first to move on higher gold prices?
PL: Yes, if history repeats itself. The gold price went up from 1971 to 1974; then we had a 50% correction. From 1976 to 1980, gold went from $90/oz all the way up to $800/oz. From 1974 to 1976, the gold equities had a terrible time, losing over 50%. Then from 1976 gold equities made a big move upward, and the first movers were the bigger companies.
The question today is whether the public will believe that the majors have reformed.
TGR: The royalty model has grown in popularity as people look for safe ways to gain exposure to junior miners. How has this changed in the last 30 years?
PL: The model has evolved to some extent. We explain the royalty model by pointing out that when investors buy gold ETFs, they must first of all pay others to hold their gold. So they are getting dinged 35 basis points a year for safety. When gold rises up 10%, investors get a 10% increase, minus the service charge. The royalty model, we say, is a gold ETF on steroids.
TGR: How do you rate your company's prospects going forward?
PL: They're just as good as they've ever been. When times are really tough, as they are now, and we have over $1B in liquidity, we can put our balance sheet to work. We can buy and create royalties. And when times are really good, and mining companies can get all the equity financing they want, that's also great for us because that money goes to explore the lands that we already have. The cycle is our friend.
TGR: Are you seeing or do you expect to see high net worth and institutional investment returning to the large-cap gold space?
PL: The short answer is yes. The question is when. Right now hedge funds and some high net-worth individuals who know the space are nibbling here and there. But if you look at the precious metals funds, one month there's a bit of influx, and then the next month they lose money. They've been losing money for two years. We have not seen the public really come back into the stocks at all.
Some of the institutions that have never been in gold are now kicking tires, looking at companies that lost the most last year.
TGR: Pierre, thank you for your time and your insights.
Pierre Lassonde is a director of the World Gold Council and was its chairman from 2005 to 2009. He is the co-founder and chairman of Franco-Nevada Corp. and was formerly President of Newmont Mining Corp. Designated a Professional Engineer by the Association of Profession Engineers of Ontario and a CFA by the University of Virginia, he was granted a Bachelor of Science by Ecole Polytechnic of Montreal and a Master of Business Administration by the University of Utah. Author of "The Gold Book: The Complete Investment Guide to Precious Metals" and a noted philanthropist, Lassonde is a member of the Canadian Mining Hall of Fame and the Order of Canada.
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-- Published: Wednesday, 21 May 2014 | E-Mail | Print | Source: GoldSeek.com
