Andy Smith Of Mitsui Global Precious Metals Changes His Mind On Gold.
For a fleeting moment this comment was going to start with the quotation about joy in heaven over one sinner that repenteth, but George Bush's annexure of religion in his comments on crusades and wars of justice made the words stick in the throat. Anyway Andy Smith of Mitsui Global Metals is no sinner, he was a bear of gold for a very long time and was very right to be so.
He has now changed his mind and is not afraid to admit it . Not for him the mealy mouthed comment ascribed by the Wall Street Journal to David Baker, a director at Merrill Lynch Investment Managers gold and mining group. "Don't buy gold as a safe haven, because you might be disappointed," he was quoted as saying, "there are other reasons to buy gold." Maybe there is a subtle message here, but Andy Smith could not make himself clearer than when he predicted "a very large , probably delayed but possibly sustained rise in the gold price" in an investment note published at the end of last week.
It is good to read something from an analyst with a sense of history. Clearly George Bush gave such lessons a miss and Tony Blair proved that he had little idea of the history of the Balkans as a tinder box when joining in the bombing of Kosovo. Andy Smith neatly picks up the President on his talk of a crusade and points out that Pope Urban 11 urged the those present at the Council of Claremont in November 1095 to go forth and begin a crusade, a "battle against the pagans" who had occupied the Holy Land. It is still not too late for Bush to catch up his reading as he will find that in the end there were no less than eight crusades lasting 200 years which were described by one Islamic scholar as "a minor irritant" and "achieving no lasting results in terms of military conquest."
Andy Smith has done a lot of interesting historical research and one of the most pertinent quotations is that from the Florentine statesman Francesco Guicciardini who warned back in 1561 that "we fight to great disadvantage when we fight with those who have nothing to lose." Suicide bombers are a new phenomenon and they are impossible to stop no matter how sophisticated the military hardware thrown at them. Their aim will be at the western world's financial systems and globalisation and a by-product of this will be curtailment of individual freedom.
Smith quotes Alexis de Tocqueville in 1835 as saying that " no protracted war can fail to endanger the freedom of a democratic country." Bush has said that "our war on terror will be a lengthy campaign unlike any we have ever seen." Already there is talk of ID cards in this country and the Chancellor has been talking of stepping up measures against money laundering. Andy Smith asks whether more closely monitored black money might not turn towards shadowy yellow brick roads as the role of gold as an ultimate store of value is recognised once more in the western world.
On a practical note he sees no reason to expect a swift spike in the gold price as it will take time for investors to accept gold after a bear market lasting twenty years. Many fund managers and commentators have never experienced anything else so it is not surprising that dealers buying gold are protecting their rears with call options. Gold producers have yet to jump on the wagon as so many have mark to market losses of tens of dollars per ounce which could be crystallised in their hedging programmes..
Nevertheless it has to be accepted that the world is now a very different place. Lack of liquidity , especially in options, could exaggerate an upward move in the gold price once the buying pressure reaches a certain level. And Andy Smith questions whether mining companies would not prefer to risk retribution from their bankers by cutting hedge positions to become fully exposed to the potential gain. He also questions whether central banks, for so long sellers of bullion, might not decide to sit on their assets rather than be accused of profiteering by selling at any early stage. This is a question that Chancellor Brown might consider in the dark hours of the night.
As any trader knows a healthy market is a two- way market involving both buyers and sellers. Andy Smith points out that Afghans may dishoard gold to fund their travel plans and Indians may not be able to resist a rising market, but as he says "two-way markets make deeper markets". A new thought for a new world.
25 September 2001
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