1a. Chairman's Opening Remarks - LBMA ND 2003 · The LBMA Indian Bullion Market Forum – New...

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003 Page 1

Opening Remarks

Simon Weeks

Chairman, The London Bullion Market Association

It is a great pleasure to see so many of you here today. I should like to thank particularly those who have travelled considerable distances from other bullion trading centres around the world to share their experience and knowledge and thereby to contribute to the future development of the Indian bullion market. On behalf of the Management Committee of the LBMA, I would like to express our thanks to all the speakers, the session chairmen and you, the audience, for your participation in this Forum.

The programme for this meeting was put together thanks to the enthusiasm and hard work of two individuals from very different backgrounds, Kamal Naqvi, who chairs our Public Affairs Committee, and our Chief Executive, Stewart Murray. Each of them has a well-known fascination (and no small amount of knowledge) about the great, sprawling, often confusing thing that is the Indian bullion market. I would like to express my thanks to both of them.

Can I also thank the many others who have already provided invaluable assistance in the preparation of this meeting. These include:

• our friends in the RBI for their constant encouragement and constructive comments on the programme as it developed

• the World Gold Council for its efforts in promoting deregulation of the market over the past decade reflected for instance in the excellent study by one of our speakers, Himadri Bhattacharya

• Nigel Desebrock of Grendon International and his sponsors for making available the Handbook of the Indian Market, which he completed recently.

I would also like to thank Sukumar Pillai, who many of you know well from his days at the WGC, who has been “our man in India” over the past two months. Being able to rely on his knowledge of the local market has given us great comfort.

I think it is worth my giving you a little of the background as to why we are meeting here today and, in particular, what we are trying to achieve over the next two days.

Firstly, let me say that this is not a marketing exercise on behalf of the LBMA and the London Market. Of course, the LBMA is much more global in its outlook than it was just a few years ago and we have been very gratified to see the success of our attempts to broaden the geographical base of our Association. We now have Associates in 15 countries and full Members based outside the UK – even as far away as Australia. But we did not set up this Forum in order to persuade participants in the Indian market to apply for membership of the LBMA.

The size of the Indian market for gold and silver has certainly been one factor in our decision to organise the meeting here. Notwithstanding the weakness of the market in the past year and the normal price-elastic reaction to the recent surge in prices (to call a spade a spade – the virtual collapse in demand for new gold supplies during the past month), there is no doubt that Indians retain a faith in gold and silver as a security for their futures that is unmatched anywhere else on the planet. No amount of lecturing or hectoring by politicians or bureaucrats is going to change that basic fact. Whether as beautifully worked jewellery, heavy weight anklets or ten tola bars buried in the corner of the farm-house, India will continue to be buyers of gold and silver. Of course the market is not static and there is no shortage of industry watchers and analysts to tell us about the changing nature of demand and to fret about the impact on the market of competition from real estate, financial products or luxury goods for the rupee in the consumer’s pocket or in some cases, bank account.

Opening Remarks Simon Weeks


In the future, the range of alternative ways of investing in precious metals will inevitably widen as deregulation continues. Paper gold, Gold Accumulation Plans, deposit schemes and other ways of recycling the huge stock of above-ground gold will all have their opportunities to shine. It is probably fair to say that previous attempts at mobilising the gold held by the Indian population have met with limited success. But they will have a much greater chance if the current obstacles to progress can be overcome with the development of a rational, efficient and secure foundation for the future growth of the business at all levels. This really is a potentially win/win situation – for the trade, the consumer and even for the exchequer. I will not try to describe the benefits of a customs and taxation regime that is accepted by the population rather than being evaded at every turn. And you only have to look at the fantastic success of the Turkish jewellery industry in the export markets since it grasped the nettle of deregulation a decade ago – and incidentally I am delighted that we have such a strong delegation from Turkey with us.

Aside from the importance of the Indian market, what persuaded us to arrange today’s meeting was our awareness of the potentially dramatic development in the trading environment in the next few years as a result of truly revolutionary changes in legislation which governs the trading of commodities. This will lead in turn to the need for the trade to set up and to learn to use structures, methods and products which are widely used elsewhere but which are in effect new to India, or at least new to the bullion market. In India, it is no exaggeration to say that a whole generation of dealers has been prevented from engaging in trading practices which in most other markets are regarded as not just normal but essential to the efficient running of a commodities trading business.

Of course, this is not to say that Indians do not make good traders. Anyone with any experience of dealing here knows all too well that they do. The historical record is full of accounts of the skill and business acumen of the sub-continent’s traders. And of course some of the more mature representatives of the trade will remember when things were a little less regulated than they have been recently. But it is an unfortunate fact that the Indian bullion trade has missed out on the developments of the last two decades – from the introduction of options in the early 1980s to products such as interest rate swaps and forward rate agreements which have recently begun to have an impact on the wholesale market in London.

Deregulation of the Indian bullion market has been happening for more than a decade now – from the abandonment of Gold Control in 1990 in fact. But in recent years, it seemed that it was being pursued with somewhat less enthusiasm by the authorities. However more recently, a string of announcements by the RBI liberalising many aspects of the financial system suggest that the timing of this meeting is propitious. It is our intention to provide a catalyst for further change but it would be foolish to pretend that we are still pushing on an open door to a bright new deregulated world.

We have gathered together here today and tomorrow an outstanding collection of speakers from both within India and from many other countries. Can I thank them all in advance for the work they have already done in preparing their presentations and for being willing to share their knowledge with us. With their help, we hope to accomplish four objectives:

• Firstly, to understand what the trade in India needs – what the barriers are and if these can be removed, what the potential of various parts of the business would be

• Secondly, to look at the experience in other markets in liberalising and the different models which have been introduced. Valuable lessons have already been learned and I daresay some mistakes have been made along the road. We want to benefit from the former and avoid the latter. Of course, it is not a simple matter of finding a single successful and replicating it here. Every country is different and it is very much up to the trade and the regulators here to find the right combination with which to build a workable and stable system

• Thirdly, to look at the elements of such a system that could be applied here – things like standards, consumer protection and taxation

• Fourthly, we will look ahead at how the market may develop in the coming years.

When we have got through all that – by lunchtime tomorrow – I suspect that we will be feeling a little weary. But our final goal will, I hope, by then be visible. With the benefit of some 20 presentations, a lot of discussion during the networking sessions and feedback from the audience, the final session is intended to enable our panel of wise men to come up with a set of recommendations about the future direction.

Chairman’s Opening Remarks Simon Weeks


After suitable fine-tuning, it is intended to submit these to the Reserve Bank and various Ministries concerned. I think by now you will appreciate that this meeting is no “junket”. We want not a talking shop but concrete results. I am very optimistic that with your enthusiastic participation we will achieve them.

And now it gives me the greatest pleasure to introduce our keynote speaker, Mr SS Tarapore. His experience and understanding of the Indian gold market are second to none, and we could not have a better start to our Forum than his review of “The Changing Needs of India’s Gold Policy”. ■



The Changing Needs of India’s Gold Policy

S.S. Tarapore, Economist

At the outset, I would like to thank the London Bullion Market Association for inviting me to this Forum. There has been a sea change in Indian gold policy and operations during the past decade. While the reforms that have been already implemented are the more glamorous and sensational measures, what remains are the more intricate measures, which need detailed attention and a lot of hard work. In developing an efficient and well-functioning gold market, we in India do not need to reinvent the wheel, but while absorbing the experience of other markets, we do need to take into account the ground realities in India. I am glad to note that the Forum will be focussing on the harder and more sensitive issues of developing the Indian bullion market, drawing lessons from other markets and devising a viable framework of regulation and standards. While experts on various aspects will not doubt impart their skills, I propose to touch upon a few broader issues, some of which are no doubt of a sensitive nature. Ingredients of an Efficient and Well Regulated Gold Market With decades of a policy of total prohibition, it is not surprising that the gold trade in India has emerged the way it has. Prohibition at the supply source viz. imports did not curb the demand for gold. All that it did was make the supply channels illicit and the trade was devoid of any regulatory standards and codes. With major changes in the official policy on imports during the past decade, the situation is now favourable for the development of a transparent, well-regulated and efficiently functioning gold market. General statements are easy to make, but as we move forward, we need to give attention to the nitty-gritty of a viable system. There is a distinct role for both regulation by the authorities and self-regulation by the gold trade and industry. With a large hoard of gold, the sources of supply are imports and recycled gold. There is a Gresham’s Law, which states that if two sources have variable standards and quality, the system will veer around to the lower standard and quality. The issue of a gold refinery has been discussed on earlier occasions and not much progress has been made. The need for appropriate import of technology and attracting foreign investment in gold is a matter that needs attention. Issues of assaying and hallmarking standards have to be faced upfront. We must be realistic and accept that hallmarking has failed to take off and standards of gold remain uncertain at best and at worst totally unacceptable. It is not enough for imports to be of international standard – the entire tiering of the trade down to the retail outlets should bear the hallmark of acceptable standards. This is easier said than done. The authorities do have a role on a number of issues. There is a need for a transparent Gold Regulatory Authority, which would lay down the broad framework and deal with regulatory infringements. It is necessary that the regulatory authority does not stifle the gold industry and trade with a plethora of regulatory knots. Equally, the authorities should not hesitate to punish violations of the regulatory framework. The authorities should not hesitate to allow total free trade in gold. It must be recognised that forward trading and a futures market do not alter the demand for gold; what this does is provide an element of certainty to the user of gold and such freeing up of the market is essential for an orderly and well-functioning market. Gold is a hybrid between a commodity and a financial asset, and in the context of recent initiatives towards capital account convertibility, it is necessary to rethink the issue of the customs duty of Rs.250 per 10 grammes. Gold has inevitably to be treated like US dollars, euro, yen and sterling and not like copper and zinc, and if we are reluctant to put a Tobin tax (i.e. a tax on foreign exchange transactions), the authorities should dispense with the customs duty on gold. The opening up of gold imports by banks has had a major impact in bringing gold imports into the official market and virtually eliminating the unofficial market. The time has now came to totally free up gold trade – both import and export. The inhibition has been the recognition by the authorities that gold has characteristics of a currency. Furthermore, the extreme contrary view – that the total ban on gold imports should be re-imposed – no longer finds any support in the context of the progressive freeing of the overall import regime. More importantly, in the context of the inexorable march towards capital account convertibility, it must be recognised that a total freeing of the gold import-export trade, with an abolition of the import duty on gold, is a necessary concomitant of meaningful capital account convertibility.

The Changing Needs of India’s Gold Policy S.S. Tarapore


The October 2002 RBI measure to merge the forex and gold open positions is a step in the right direction. There is an urgent need to bring bullion banks and non-bank entities trading in gold on a level playing field. This would be vital in developing the retail gold trade of banks by offering Gold Accumulation Plans and Gold Certificates. The gold deposit schemes of banks do have the problem of the indifferent quality of gold submitted and the problem of depositor dissatisfaction with the gold content of jewellery. It would be best if there were facilities for the conversion of jewellery into standard gold by a centralised organisation with branches, which would authenticate the gold after proper assaying. This would mitigate the problem of banks offering gold deposits. Again the gold scam of 2001 should not deter the development of the gold market. The government securities market was afflicted by scams in 1992 and 2001, and this has not deterred the development of the gilt market. One has to learn from the mistakes of the past and continue with reforms. Need for a Regulated Bullion Exchange A freeing up of the gold trade does not mean that there should be a free-for-all where proper regulation and standards are given the go-by. On the contrary, there should be a transparent regulatory system with a strong bias towards attaining exacting standards. It is in this context that the authorities should encourage the setting up of a Bullion Exchange. The Bullion Exchange should be open to banks dealing in gold and other organisations like the Minerals and Metals Trading Corporation and the State Trading Corporation. The Bullion Exchange should also be open to the gold trade. Only members of the Bullion Exchange should have the right to undertake import, and export of gold and imports by members should be totally free from import duty. Members of the Bullion Exchange should be allowed to participate not only in spot trade but forward trade and futures. As a corollary to this, the facility of imports by individual non-resident Indians (NRIs) would need to be discontinued. Such a prohibition would also be supportive of anti-money-laundering measures. Gold as part of the baggage of returning Indians could be subject to customs duty on a par with other goods. There would no doubt be an attraction to join the Bullion Exchange. It is here that the Bullion Exchange can be really effective in ensuring exacting standards of assaying and hallmarking. The Bullion Exchange must have a transparent code of conduct and strong adverse action should be taken in the case of erring members. The Bullion Exchange can, if deemed feasible, use the infrastructure of the National Stock Exchange (NSE). The Bureau of Indian Standards (BIS) should have an integral association with the Bullion Exchange in ensuring exacting standards. It is estimated that final consumers of gold lose an average of Rs.8,000 crore per annum by virtue of questionable quality of gold, and there is a need for strong consumer protection. The problem of poor quality is so acute that there is a need for setting up an office of a Gold Ombudsman to which consumer complaints can be directed. The decision of the Gold Ombudsman should, as a practice, be treated as final as far as the seller of gold is concerned, though a consumer should always have the right of legal redress. The reference to questionable practices is not to cast aspersions on the entire gold trade but merely to isolate errant traders using sharp practices from that part of the trade which follows the regulatory framework and is law abiding. In fact a strong regulatory framework with a facility of a Gold Ombudsman would be a boon to the trade as well as the consumer. There should be an optimal mix between self-regulation and regulation by the authorities. The stronger the self-regulation, the less the need for detailed regulation by the authorities. We in India have a lot to learn from the operations of the Bullion Exchanges in major financial centres as well as in emerging markets. The opening of a Gold Exchange in China in October 2002 would no doubt be a wake-up call for India. Official Gold Reserves There has been, over the years, a de-emphasis on gold as an official reserve asset. It has been argued that gold as a reserve asset earns a very low rate of return and had best be dispensed with. The track record, however, is very different. Central banks and international organisations hold about 32,000 tonnes of gold, or about one-fourth of the above the ground world stocks. When there is relative stability in the international economy and inflation is low, gold as a reserve asset is relatively less attractive. But when there is an element of instability, the demand for gold rises, and it becomes more attractive as a reserve asset. The problem with paper currency as a reserve currency is that over time, reserve currencies develop weaknesses. The long-term experience of sterling and the US dollar clearly point to the inherent weakness of a reserve currency. The Japanese and German authorities, therefore, never really facilitated their



currencies becoming a reserve asset. With the advent of the euro, there are now only four reserve currencies viz. the US dollar, the euro, the yen and sterling – and periodically, each of these is wobbly. One can appreciate the agony of central bank officials who have to manage the reserves portfolio. Some of them hanker for a Gold Standard. Gold does not suffer from the weakness of other reserve currencies as it is no one’s liability and, in a sense, is the Ultimate Settlement Currency. More importantly, gold prices move anti-cyclically to reserve currencies. Hence, there is a strong case for countries to diversify their reserves and hold a part of their reserves in gold. Again, gold is as liquid as any other financial instrument. As the volume of trades cleared through the London market average $ 6 billion a day, Indian official reserves can be deemed to be totally liquid. It is pertinent to observe that the share of gold in total reserves is substantial for the leading industrial countries: US (58 per cent), France (51 per cent), Italy (48 per cent), Germany (38 per cent) and Switzerland (37 per cent). The European Central Bank has an explicit stipulation that at least 15 per cent of its reserves have to be held in gold. In the case of India, gold holdings amount to 360 tonnes, accounting for less than 5 per cent of India’s total reserves. A substantial part of the RBI’s gold is held in trinklets and bars which are not of international standard. Even if the RBI is constrained to have a passive gold policy, there would be an enhancement in the quality of its gold assets if its trinklets were used in a Location Swap, which would at least render the gold reserves into an earning asset. The minting of gold coins also needs to be considered. With a static holding of gold reserves by the Reserve Bank of India and a continuing rise in the total Indian reserves, the share of gold in Indian reserves will keep coming down as purchasing gold in the international markets is a strict “no-no”. A rhetorical question is whether the Indian authorities would consider selling its gold, and here again the answer is a strict “no-no”. Such a paralysis on gold reserve policy is hazardous. First, the country by its inactive gold policy incurs very large losses, as it does not benefit from the fluctuations in gold prices. Now if the RBI were able to adroitly shuffle its currency portfolio, there would be no reason to believe that it could not periodically increase and decrease its gold holdings to its advantage. Recently, the RBI has foregone large gains by not dealing in gold. It is insensate to stipulate, as is implicitly done in the present legislation, that while currency swaps are a permitted activity for the RBI, gold leasing, the RBI cannot use swaps and deposits with banks to enhance the value of its gold reserves. The country has to pay a very heavy price for a false sense of values and morality. Secondly, only a very small segment of RBI’s gold is interest earning. Had the entire RBI gold stock been deployed actively over the last 50 years, at an average modest return of one percent per annum, India’s gold reserves would have been 60 per cent higher than they are. With deft management, the gold reserves would have increased manifold. Over the past year gold prices have seen an increase of about 25 per cent in dollars, 14 per cent in yen, 13 per cent in sterling, 9 per cent in euro and 7 per cent in Swiss francs. This does give a message to the RBI. The Indian authorities would be interested to know that over the past year or two, Chinese gold reserves have increased by a fourth to 500 tonnes. When the gold price goes down, the passive policy of the RBI on gold reserves inflicts heavy losses. Quite apart from advantages of an active gold management policy, the RBI needs to arrive at an optimum proportion of gold in its total reserves – and this optimum level would surely be significantly higher than the present 5 per cent level at which the RBI is clearly under-invested as compared with the major industrial countries. An unchanged quantum of gold is a sure way of incurring large and uncontrolled losses. The passive policy on gold reserves is a policy of flagellation. It would be totally unfair to blame the RBI for this impasse. The polity has to bear the responsibility for the extremely risky gold management policy. The RBI would do well to have a Discussion Paper prepared by its Development Research Group on the issue of gold reserves management, and the polity would need to be made aware of the cost of the policy of paralysis. This would then enable the government to formally place before Parliament a statement of intent on revising the present gold reserve management policy. In the absence of carrying along the polity with it, the RBI would be trapped in the present policy of paralysis. Attempts to persuade the RBI to on its own alter the policy of paralysis would be totally otiose. One has to persuade the polity to alter its views and it is here that a Discussion Paper by the RBI’s Development Research Group would be timely.



Setting up of a Gold Bank The idea of a Gold Bank was seriously contemplated by the authorities and in fact the Budget of February 1992 gave a categorical indication that such a bank would be set up. Unfortunately, this seminal idea was given up by the authorities for the wrong reasons. It was felt that a Gold Bank would not be a viable organisation and that its earnings would not cover the cost of operations. It is indeed sad that a well-conceptualised idea was thwarted because of false fears and hang-ups. With the major changes in gold policy and operations, the time has come to revisit the proposal for a Gold Bank. Given the way the RBI is hamstrung by the polity, it may be best that the RBI and the government do not take the lead in setting up such an institution. To enable the proposal to take off, however, it is essential that the RBI and the government should not be averse to the idea. Ideally, one would wish that the authorities proactively encourage the emergence of such an institution. As a second best, the authorities should be neutral and not thwart the setting up of such an institution. If such a limited signal were given by the authorities, there would be sufficient sponsors for the setting up of a Gold Bank. The outlines of a Gold Bank could inter alia cover the following:

(i) A Gold Bank could be set up by select public sector banks, private sector banks, foreign banks, foreign investors and other institutions concerned with the gold trade. The initial paid-up capital of Rs.50 crore can be quickly increased as the bank’s operations pick up. Since the ownership would be wide, the initial exposure of any single institution would be small. If, however, a few institutions are keen to take up a larger share in the paid-up capital of the Gold Bank, there should be no objection to such a response

(ii) The Gold Bank would not try to mimic the operations of the present banks and institutions active in the import of gold and the operation of the Gold Deposit Scheme.

(iii) The Gold Bank could, inter alia, operate as a sort of refinancing agency for banks which may face very temporary asset liability mismatches.

(iv) The Gold Bank should be empowered to foster the development of new gold linked instruments including paper gold products like the Gold Accumulation Plans and Gold Certificates.

(v) The Gold Bank should be permitted to operate in international markets and there should be no restriction on the Gold Bank holding gold abroad, buying and selling gold in spot, forward and future markets (with strong prudential norms) and leasing and deposit/lending activity should be permitted.

(vi) The Gold Bank should be permitted to offer various products like gold for gold, gold for rupees and gold for foreign exchange both in India and in international markets.

(vii) To the extent the present legislative/regulatory restrictions inhibit the operations of the Gold Bank early attention should be given to easing of these restrictions.

(viii) As part of the policy/attitudinal changes necessary for the setting up of a Gold Bank, it would be highly desirable to allow the setting up of gold mutual funds. Such mutual funds have a great potential and the RBI and SEBI should no longer hesitate to permit the setting up of such schemes by mutual funds. The Gold Bank could have an integral link with the gold mutual funds.

Cynics would no doubt claim that a Gold Bank would not be viable. If an institution meets a felt need it would, over time, be able to grow. I am emboldened to say that a Gold Bank would be able to earn its keep from day one and would need no subvention. In fact, over time, initial investors would be the cynosure of those who do not get on the bandwagon. For the idea of a Gold Bank to fructify all that is required is the dictum by General George S.Patton “Either lead, follow or get out of the way”. Is the Indian polity listening? ■


Gold Survey 2002 – Update 2

Paul Walker

Director, GFMS

Before I begin I’d like to thank our cover sponsors and the survey sponsors for their generous support of the Survey and its Updates in 2002 – without it we’d simply not be able to continue to provide the same quality and reach in our research.

Last year’s cover was sponsored by Tanaka, the Austrian Mint and Commerzbank, and I am sure you’ll agree, it’s one of our best to date. In terms of general sponsors, you’ll see that we have support from a wide cross section of the industry. Hopefully we’ll have an Indian sponsor one day soon.

I will take you through our first flash estimates of supply and demand in 2002, an analysis that will hopefully enable us to explain why we see the price where it is today, and where it is likely to go in the future.

US$ Gold Price

The gold price has been in continuous ascent since bottoming out at $255.95 (pm fix) on 2 April 2001. Gold averaged $310 in 2002. Its price rose 25% intra-year, which was the highest such percentage increase recorded since 1979.

Gold’s 14% year-on-year rise also bettered that of nearly all commodities and financial assets, many of which suffered large declines – for example, the broad US equities index, the S&P 500, fell by 23%.

There were three distinct phases for prices last year: a fairly steady rise from $280-$285 in early January to just over $325 by late May; sideways trading in a rough $305-$325 range to early December and lastly a sharp rally to almost $350 later that month. As of yesterday, gold closed in London at $366, representing another $20 or so gain in the last four weeks.

It is a widely held belief that the US dollar’s strength is always critical for gold and this relationship was frequently traded last year, especially against a resurgent euro. It was therefore unsurprising to see days when dollar/euro moves closely matched changes in the gold price, and the year-on-year changes in the gold price and the dollar/euro were quite similar.

However, the dollar/gold relationship is not as strong as often supposed. For example, the annual average trade weighted dollar fell just 1% year-on-year in 2002.

250

300

350

400

US$

/oz

Jan-00 Jul-00 Jan-01 Jul-01

US$ Gold Price

Jan-02 Jul-02

2002 Intra-Year +25%

2002 Year-on-Year +14%

Gold Survey 2002 – Update 2 Paul Walker


The weakness of the link should come as less of a surprise when one remembers that the dollar’s strength is but one factor, albeit an important one, in a basket of gold price drivers.

Supply Estimates for 2002

Gold Supply Estimates for 2002

3.5%549530Official sector sales

-1.8%3,8703,941TOTAL SUPPLY

n/a-129Net disinvestment

14.4%778680Old gold scrap

-2.3%2,5432,602Mine production

y-o-y2002 E2001

The main surprise in 2002 was the decline in mine production by 60 tonnes. As you will see when I discuss the demand categories, the rise in scrap by 15% and the changing of net disinvestments to investments were certainly sizeable changes from the previous year, but could not really be considered ‘surprises’ given the performance of the gold price. Net official sector sales remained broadly stable.

Mine Production

The year 2002 represented the first decline in mine production by more than ten tonnes since 1975. Both 1994 and 1995 saw mine production fall, but by only nine tonnes and six tonnes respectively.

Also interesting is the fact that mine production from those countries traditionally regarded as the ‘top four’ biggest producers has consistently fallen over the past five years and this trend looks set to continue in 2003.

Consolidation in the industry has seen some important changes in the pecking order of the largest producers. The ‘top four’ mining companies in 2002 were:

i. Newmont – 233 tonnes

ii. Anglogold – 182 tonnes

iii. Barrick – 177 tonnes

iv. Gold Fields Ltd – 147 tonnes

Production from the ‘top four’ mining companies represented 29% of total output.

Lower production in the United States and Indonesia contributed to the overall drop, although they were not alone. Gold production in 12 out of the top 20 producing nations fell year-on-year. In the United States, operational difficulties, lower grades and a handful of mine closures left production 37 tonnes lower year-on-year. Lower volumes from operations in the last stages of production and a drop in grades at the world’s largest gold producing mine, Grasberg, which reported a 19% decline in gold output year-on-year, combined to leave the full year total in the country 34 tonnes lower at 149 tonnes. Falls of 3% in production were recorded in Australia and Canada.

Less than 1% of costed production had total cash costs above average price of $314/oz in Q3 2002. South African cash costs, whilst falling for the nine months to September, were calculated at $169/oz. Although this was considerably lower than the costs reported for the corresponding period in 2001 ($207/oz), intra-year costs in the country have actually increased quite sharply in line with the rapid appreciation in the rand against the dollar.



Change in Supply from Above-Ground Stocks

The more than 14% rise in world scrap supply was largely due to a 33% increase in Middle East supplies. The net change in the supply of gold from the official sector, i.e. government central banks, was small and broadly in line with expectations.

The largest change in 2002 concerning above ground stocks was the reversal of the ‘net residual’ supply/demand balance from a supply side factor to a component of demand. I should explain that the number for Implied Net Investment is derived from combining all the other independently calculated elements of supply and demand. The residual from this calculation is therefore not independently calculated. Furthermore, the terminology used is significant; the qualification implied shows that the number, though predominantly a reflection of net (dis)investment of bullion in Europe and North America (not captured in the other data series) can and usually does reflect additional gold flows, which may be offsetting, from non-investor sources.

Regional Changes in Scrap Supply From 2001

A major increase in Egyptian scrap and less dramatic but still significant increases in Saudi Arabia, the United Arab Emirates and other countries in the region more than offset a decline in Turkish scrap supply. With the average 2002 local price in Egypt, converted at the official exchange rate, some 30% higher year-on-year (against a 14% increase in the dollar price) and the economic situation remaining difficult, scrap generation registered a major rise. With local gold trading at a discount to the international price, Egypt became an important net exporter of gold during 2002, exporting both to other countries in the Middle East and to Europe.

Indian scrap volumes rose sharply year-on-year, driven primarily by higher prices although there does appear to have been some distress selling associated with the drought in parts of the country. GFMS data covers the sale of old gold for cash, and importantly does not count the exchange of old jewellery for new. Those familiar with India will recognise that GFMS’ definition of scrap necessarily excludes a substantial volume of the “churn” in that market. Our research suggests that the exchange of old gold jewellery for new could be as high as 60% of total turnover in parts of India, although on average it is almost certainly lower than this.

Official Sector – European and Other Gold Sales

There appears to have been a continuance of a trend that shows official sales creeping up a little in the 2001 to 2002 period, primarily from central banks not signatories to the September 1999 Agreement. There is some evidence that last year, this gently rising trend in supply may have partly been induced by higher gold prices. If this is the case, sales might be expected to rise further this year, should gold remain around or above our forecast price, which I will talk about towards the end of my presentation.

Looking forward, GFMS believe that a renewal of the CBGA is close to certain and we would not be surprised for this to be confirmed by participants during the course of this year. The terms, however, of a

Change in Supply from Above-Ground Stocks

-250

-200

-150

-100

-50

0

50

100

Scrap Official Sector Disinvestment

tonn

es

2002 compared to 2001

Gold Survey2002 – Update 2 Paul Walker


second agreement could change. In our opinion, the most likely outcome is that the sales limit will be raised somewhat in order to accommodate existing and new sellers.

Gold Demand Estimates for 2002

The close to 2% decline in total demand last year suggests only a limited response to both the weak global economy and higher gold prices.

However, as the above table shows, there were sharply contrasting trends amongst some of the main demand components and, in particular, fabrication demand was clearly affected by these factors.

Bar hoarding increased by a modest 3%, with rises in Japan partially offset by falling demand in India.

One of the most significant contributing factors to the rising gold price in 2002 was producer ‘de-hedging’. As can be seen from the table, the reduction in producer hedging resulted in nearly 200 tonnes of additional demand over that recorded in 2001.

World Gold Fabrication

Fabrication demand fell by 376 tonnes in 2002; in part due to slower global economic growth, most obviously in the United States and Western Europe and also in part as a function of the higher gold price.

To understand first of all the price-related impact on fabrication, it is worth differentiating between the first and second halves of last year, not least because much of the price rise was concentrated during the first five months, followed by a period of relative calm before the rally in December. The decline in fabrication offtake during the first half of 2002 was around 300 tonnes (y-o-y) versus around 80 tonnes (y-o-y) in the second half.

All of the major jewellery fabricating regions posted lower demand in 2002 although the largest decline, in both absolute (-154 tonnes) and percentage (-21%) terms, was recorded in the Indian sub-continent.

Gold Demand Estimates for 2002

n/a103-Implied investment

123.8%352157Net producer hedging

-10.6%3,1643,540Total fabrication

-1.8%3,8703,941TOTAL DEMAND

2.9%252245Bar hoarding

-2.7%459472Other fabrication

-11.8%2,7043,067Jewellery

y-o-y2002 E2001

World Gold FabricationAnnual year-on-year change, tonnes

-500-400-300-200-100

0100200300400500600

1991 1993 1995 1997 1999 2001

tonn

es

0.00.51.01.52.02.53.03.54.04.55.0

Rea

l GD

P G

row

th(%

)

GDP Growth

EstLast two years cumulative fall in global fabrication demand of just under 600 t.



The sharp fall in Indian demand seen last year should not really come as too much of a surprise, considering the price sensitivity of the Indian market. Average rupee prices were up by around 15% year-on-year, and the initial response of the Indian consumer was to cut back sharply on purchases of “new” gold, and to increase the volume of old jewellery exchanged for new. This effect was particularly acute in the first half, especially in the second quarter as prices pushed above the 5,000 rupee per 10 gramme level (during June, with the average gold price at 5,313 rupees, imports fell to just over 10 tonnes for the domestic market, and the exchange of old jewellery for new rose markedly).

Although the price level is obviously important, volatility is also a key driver of offtake in India. Consumers are arguably as sensitive to changes in the price as they are to the price level, and the oscillations in the price throughout the year discouraged demand for extended periods of time.

Total fabrication in Europe fell to 732 tonnes in 2002, the lowest level since 1989, mainly as a result of lower jewellery demand and a sharp fall in electronics fabrication. Italian jewellery fabrication fell over 50 tonnes, largely due to lower exports but local consumption was also weak.

With the exception of Turkey, fabrication demand across the Middle East registered a fairly substantial decline. Continued and heightened geo-political tensions, combined with higher gold prices, drove the drop in fabrication, whilst improved tourist arrivals contributed to the rise in Turkish fabrication.

East Asian jewellery fabrication demand fell by 10%, largely as a result of significant falls in Thailand and Taiwan, whilst electronics and other industrial demand rose marginally.

Compared with 2001, jewellery manufacturing in the United States performed relatively well in 2002, contracting by an estimated 2.5%, in contrast to the 13.1% fall the year before.

Fabrication Demand in 2002 – Key Points Summary

Slow global economic growth was a prominent factor in lower fabrication demand, impacting on both North American and European fabricators supplying their own markets and, just as importantly, on the many countries that export semi-finished and finished jewellery into those key regions.

Much of the fall in 2002 fabrication demand can be attributed to the first half fall in India. As explained earlier, the fall, particularly in the first half was a combination of the higher local gold price and localised droughts.

Falls in fabrication demand in other countries where price was the dominant factor included Saudi Arabia, Egypt, Indonesia and, indirectly via its impact on exports, Malaysia and Dubai.

Jewellery’s share of consumer discretionary spending fell marginally and, within the jewellery sector itself, competition came from stones and other materials, to the detriment of plain gold pieces.

For a while now, silver has benefited from this trend but more recently branded pieces and mixed materials (leather, rubber, crystals and so forth) have become more prominent. Consumers now appear more willing to pay for the perceived value of a branded piece, whatever material is used and despite some incredibly high markups, rather than for the value of any precious metals intrinsic in other pieces.

-180-160-140-120-100

-80-60-40-20

020

tonn

es

Indian S-C

Middle East

Europe

Fabrication: Winners and Losers(Figures represent year-on-year change, i.e. 2002 less 2001)

East Asia

North America

OtherChina

Latin America



Net Market Impact of Producer Hedging

Why do miners typically hedge future production? Typically for one of two reasons; either for opportunistic purposes, because selling production forward enables them to benefit from a “forward premium” in the form of the gold market contango; or for more defensive purposes, to protect revenue against falling prices and to secure a minimum income.

Following on more than two decades of growth, the global hedge book has now declined for three consecutive years. Of particular interest is that over this period, the pace of dehedging has accelerated significantly.

The staggering 352 tonne decline in the global hedge position last year was primarily motivated by the strong and sustained increase in spot prices and more importantly, expectations within the producer community that prices would continue to rally. Locking in fixed prices for future production while prices are expected to rise clearly limits a producer’s ability to fully participate in the upside and acts as strong incentive to reduce committed sales volumes. In addition, low interest rates kept the contango at very narrow levels, and reduced the forward premium to a minimal amount. In these circumstances, it is no wonder that producers were reluctant to take on further forward positions and scrambled instead to deliver into the spot market.

A large percentage of the reduction in the hedge book can be attributed to the run down in outstanding positions by three of the biggest hedgers in the industry. Barrick, AngloGold and Placer Dome reported a combined year-on-year decline in their forward contract positions of around 240 tonnes, achieved primarily through scheduled deliveries from mine production.

In addition, Newmont, Cambior, Echo Bay and Randgold Resources all reported that they had closed out some contracts prematurely. Lastly, producers such as Western Areas and Kingsgate restructured their hedge books with option strategies to increase their flexibility to deliver into the spot market and take advantage of the increasing price.

Please note that only limited data was available for the December quarter analysis, so the data shown in the chart should be considered provisional estimates. Final figures will be published in the Gold Survey 2003 in April.


-250

-150

-50

50

150

250

350

450

99.H1 99.H2 00.H1 00.H2 01.H1 01.H2 02.H1 02.H2

tonn

es

Est

Supply

Demand



Total Accelerated Supply from Producer Hedging

This next chart summarises the net impact on the physical market of producer hedging over the past ten years.

The hedging boom has been a consistent source of accelerated physical gold supply since the late 1970s, encouraged by mining company financiers and bullion banks based on low gold borrowing rates. However, the fall out from the announcement of the Central Bank Gold Agreement in September 1999, which I talked about earlier, was a hedging crisis brought about by crippling gold borrowing or lease rates.

Indeed, from its peak in the third quarter of 1999 to the end of 2002, the global hedge book has declined by over 700 tonnes. Consequently, the physical gold required to support the producer book has shrunk from roughly 3,400 tonnes to 2,700 tonnes, down 20% over the period, and back to levels last recorded in December 1998. This of course goes some way in explaining the current low level of lease rates. Producer hedging accounts for close to 60% of the total pool of lent/borrowed gold so that, all other things being equal, a decline in the volume of gold required to support the hedge book would tend to put downward pressure on gold leasing rates.

Investment & Supply/Demand Residual Balance

The largest change in percentage terms of all the supply and demand components occurred in investment.

I have added together coin fabrication, bar hoarding and the net residual component to show as ‘World Investment’. As explained earlier, the net residual is derived from combining all the other independently calculated elements of supply and demand. It is therefore not independently calculated. GFMS estimate that world investment grew by 142%, or 245 tonnes in 2002.

Economic and political developments were, in general, very positive for gold investment in 2002. The sluggish global economy put corporate profits under pressure and this helped to push stockmarket values sharply lower.

Total Accelerated Supply from Producer Hedging*

0

1

2

3

4

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

thou

sand

tonn

es, e

nd-y

ear

Est.

* outstanding forward sales, loans and net delta hedge against positions

2001 2002e

Mine Production 2,603 2,543Scrap 680 778Official Sales 530 549Total Supply 3,813 3,870

Fabrication* 3,484 3,101World Investment** 172 417Producer de-Hedging 157 352Total Demand 3,813 3,870

*fabrication excludes coins, **investment includes coins, bar hoarding + residual balanceSource: GFMS

Investment and the Supply/Demand BalanceMajor supply & demand variables in tonnes



Gold’s other great rival, the US dollar, was also on the slide – against the euro, for instance, it fell 16% between the start and finish of 2002. Meanwhile, on the political front, gold was supported by growing pressure from the United States for a pre-emptive war against Iraq. Similarly, and towards year-end, fears regarding North Korea’s nuclear pretensions came to the fore. This favourable backdrop for gold investment was enhanced by the stellar price performance of the metal itself, gold’s 25% intra-year rise contrasting with the poor performance for stocks and the dollar. Indeed, for the first time in years a virtuous circle may have developed, with successive rises in the price creating fresh investor interest in gold and so on. This is, of course, the mirror image of what occurred during the past decade, when investors’ faith in gold was undermined by more or less continuous price declines.

Funds’ Activity

Activity on both the Comex and Tocom exchanges experienced strong growth in 2002, reflecting the increase in speculative interest in gold. On the Comex, the total volume traded and average daily volumes were both up by over 25%.

Much of the buy-side activity there has been from funds has come from those looking to make a quick return on a spike in the price, rather than the result of longer-term portfolio allocation considerations. There has not been a great deal of investment buying from institutional investors.

In fact, the industry’s challenge is to bring in a more committed type of investor. Success or failure in this enterprise may well determine whether the current move is sustainable, let alone if there is any further upside to the price.

Investment in 2002 – Key Points

In conclusion, the key points to note about gold investment in 2002 are:

• Firstly, the largest contribution to demand has come from investment and hedge funds attracted in the short term by gold’s recent performance. These funds are mostly operating via the futures exchanges – therefore, their interest in gold translates into only a small amount of physical demand

• Secondly, purchases from a small number of high net worth private investors have also been important, unlike retail investment, which has disappointed

• Thirdly, a sizeable proportion of investment demand is driven by short-term profit objectives

• Lastly, defensive, safe-haven type of buying has certainly increased but it still represents the smaller part of the investor demand seen to-date.

Funds’ net long position rose in 2002(non-commercial net open interest in Comex futures)

-80

-40

0

40

80

Jan-00 Jan-01 Jan-02

Net

pos

ition

s (co

ntra

cts,

thou

sand

s)

240

260

280

300

320

340

360

US$

/oz

Gold Price

Long

Short



Gold Supply Forecasts for H1.2003

I mentioned that some of the decline forecast this year in mine production was due to temporary factors – more specifically, this involves temporary factors at Grasberg, the world’s largest producing gold mine.

When lower grades are compounded by operational difficulties, the loss in gold output can be considerable. In 2002, the significant drop in grades in the first six months of the year, combined with heavy rain in June, saw output at the mine some 30 tonnes lower – clearly a large slice of the total year-on-year fall in global gold production. However, output at the mine is expected to return to higher levels this year, and indeed, in the medium term, company estimates show that production levels will remain broadly stable.

Global mine production in the first half of 2003 is therefore expected to mostly recover and rise by 3.3% to 1,256 tonnes. This level of output is still less than the first half of 2001, when 1,279 tonnes were produced.

Official sector sales are expected to rise in the six months to June 2003. As mentioned earlier, we think there is evidence that higher gold prices were part of the reason for the slight increase in net official sector sales last year. Thus, sales might be expected to rise further this year and we estimate they will in fact increase by just over 30 tonnes.

GFMS have forecast for scrap to fall by 11% in the first half of 2003. This is mainly because static or lower gold prices normally lead to lower volumes of scrap supply.

Also, at some point the highly mobile reserves of scrap will have all come out and it is possible we are approaching this stage in some countries. As such, future rallies may not generate quite the same volume of scrap that a similar rally previously would have given.

Gold Demand Forecasts for 2003.H1

World fabrication is forecast to rise by over 4% during the first half of 2003, largely due to a recovery in jewellery offtake, based on an average price in the region our first half forecast, which I am getting to, suffice to say that it is lower than the current price.

For much the same reason, GFMS have forecast that bar hoarding will fall year-on-year in the first half by a relatively small amount of 9 tonnes. It should be remembered that in 2002, particularly in the first six months, Japanese gold investment increased by 35 tonnes year on year and was the main reason bar hoarding rose in 2002.

Net producer hedging, or ‘de-hedging’, will decline from the record level of 202 tonnes recorded in the first half of 2001 to a still influential amount of 135 tonnes. I will elaborate on this in a minute.

After calculation of forecasts for each of the separate components of supply and demand, we have determined that the residual, termed ‘new investment’ for reasons that I have already explained, will increase by 44 tonnes year on year, to total 70 tonnes in the first half of 2003.



Indian Gold Fabrication

Obviously, one of the most important elements of fabrication demand is Indian offtake. The forecast rise in jewellery demand is expected to come mainly from here, where offtake should be up on the very poor figures for the first half of 2002.

As the chart shows, a key question is; what way will the rupee price move in the next few months?

World GDP Growth

Another factor that will affect fabrication is the state of the world economy.

GFMS believe that a meaningful recovery in GDP growth looks a distant possibility. Instead, given recent pessimistic US indicators and should the consumer credit bubble burst, having only been sustained in recent months by unprecedented levels of equity withdrawal from property, then a further slowdown seems increasingly likely. This outlook for world GDP also leads us to believe that further falls in world stock markets are probable. Such a development should encourage additional investment in gold as its safe-haven status comes to the fore. This could be accompanied by further dollar weakness which might bring additional support to the gold price should certain investors continue to trade the link.


Looking ahead to the first half of the current year, GFMS estimate that there will be a further net decline of 135 tonnes in the global hedge book. This number is based on the assumption that producers will continue to deliver into forward positions without doing any new hedging, based on prices remaining firm and the contango remaining marginal.

Indian Gold Fabrication

0

200

400

600

H1-95 H1-97 H1-99 H1-01 H1-03

tonn

es

0

1,000

2,000

3,000

4,000

5,000

6,000

Rup

ees/

10g

Indian Gold Price

Forecast

?

World GDP Growth

0

1

2

3

4

5

6

7

1970 1974 1978 1982 1986 1990 1994 1998 2002

Ann

ual C

hang

e (%

)

Forecast

Source: IMF



Of course, this could be a somewhat conservative forecast – if producers, both shareholders and management, believe that gold will continue to rally, there could be further buy backs in the first half of 2003. Harmony, for example, is still sitting on an estimated 48-tonne position (reluctantly) inherited through their acquisition of Australian producer Hill 50 in June last year. Meanwhile, Placer Dome took 100% ownership of AurionGold in December and management have already announced plans to cut the new combined hedge book, of around 400 tonnes, to take advantage of higher spot prices.

On the other hand, there could be a fresh wave of protective and opportunistic hedging on higher prices. In particular, purchased puts are relatively cheap at present and at current spot prices, protection against a possible downward correction to the gold price could be, for some, too good an opportunity to miss. De-hedging will continue to support the price in first half, but its impact could be less than in H1 2002.

Investment

Investment will continue to be one of the key drivers of the gold price moving forward, and is likely to be influenced by, amongst others:

• political insecurity

• low to falling interest rates

• weakness in the global economy and stock markets

• the strength of the US dollar.

Adding together the separate categories that make up the GFMS estimate for world investment – namely bar hoarding, coins and the implied net investment residual – we forecast that world investment in gold will increase again during the first half of 2003.

This is perhaps unsurprising, given gold’s price excellent performance in 2002 and the fact that the mix of economic and political factors behind much of the price rise are yet to show clear signals of their future direction.

World Investment

0

50

100

150

200

250

300

01.H1 01.H2 02.H1 02.H2 03.H1

tonn

es

Forecast

World Investment: Bar Hoarding, Coins, Implied Net (Dis)Investment



Price Outlook

The continued rally in the gold price since early December makes forecasting over the next few months all the more risky but several observations can be made.

Firstly, there are grounds to believe that a lot of the recent gains have come in a thinly traded market and have been based largely on an inflow of highly speculative money onto commodity exchanges and into over the counter derivative products.

Secondly, the price spike will cut demand in price sensitive areas. Reports have surfaced in the last week or two of Indian demand drying up in reaction to escalating prices, as occurred in the first part of 2002.

GFMS have forecast for fabrication in the first half of 2003 to recover by 4% based on our price assumptions. With prices above $350, fabrication could fall below the depressed levels of the first half of 2002. This, plus higher scrap volumes, could serve to stop any rally in its tracks, however, it should remain intact in first half 2003 and the rising trend will probably therefore be resumed after a post-Iraq correction.

In conclusion, building momentum from investors and the prospect of a more serious, prolonged MiddleEast conflict raise the possibility of prices moving above $370, but equally peace and speculator profit-taking could see the price move back towards $310, even lower. If by chance political events turn out to be much less dramatic, a more likely outcome is weak fabrication slowly outweighing still limited investment, with prices eventually settling closer to our first half average of $330. ■

200

250

300

350

400

US$

/oz

GFMS Gold Price Forecast for First Half

Jan-00 Jul-00

Core Gold Price Range in H1 2003: $310-$370

Average : $330

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03


Session 1: Introduction and Keynote Speech Questions and Answers

Questions for S.S. Tarapore

Q – Simon Weeks: You mentioned that you had some concerns about gold quality. Are you advocating, perhaps, a form of internal good delivery in India similar to what we have in London, for example?

A – S.S. Tarapore: I would certainly fully endorse it.

Q – S. Weeks: In terms of the proactive management of reserves and, obviously, it has been many years since the RBI took any action at all, do you really feel that unless we have this developing gold bank that it will be many more years before the RBI will be in a position to react once again?

A – S.S. Tarapore: You are right, but I would like to split it into two parts. One is bringing to the attention of the polity the problems of a passive gold reserve management policy, which says that you cannot do what you would like to do with your reserves. The RBI is allowed to hold gold – it is part of the legislation. But tradition has said that you dare not buy and you dare not sell; you cannot lease and you cannot deposit the gold other than with central banks. The same central bank, the reserve bank, is allowed to put its foreign exchange reserves with top-rated banks, but it can’t place its gold. It can exchange euros into dollars and vice versa, as well as carry out many other transactions unfettered, but it cannot in the case of gold.

There is a legislative barrier that states that you can only buy and sell. You have to ask is it made explicit what you can do with it, and therefore, is this implicitly a prohibition on any activity in gold? The answer has to be to get out, and that’s impossible as such because one has to hold the gold. You should hold the gold sensibly.

The point I am trying to make is that we must get the polity to understand the cost of a passive management policy through a discussion paper, which looks at what other central banks across the world do – how many central banks followed this kind of a policy, which can really damage them. Do we want to inflict losses on ourselves, or do we want to say, do your business with the central banks, follow cautious policies, but earn the best rate you can with the kind of prudential risks, which you take.

The gold bank, on the other hand, should be carrying out operations, which the reserve bank does not do. The first steps are the baby steps, to get the RBI’s present gold held sensibly. The second stage is a commercial organisation undertaking activity in the gold markets abroad and in India and, in that sense, linking the two markets.

A major step is that gold imports should be allowed in the most sensible way, as it was previously, where you don’t have to carry so much of the metal. There is a commercial minimum value, as with steel or aluminium and, therefore, it makes sense to open up the banks and others. But a gold bank should be able to do more than that. It should be able to operate in the markets abroad and in India to its own optimal advantage. It is not a threat to the existing banks through investing in the gold deposit scheme, or, importing gold. You are trying to move one step further and if you feel that it is risky, you are spreading the risks to banks, be they public sector banks, private sector banks, foreign banks, institutions, or foreign investors. It is a basic principle of risk management that you spread the risk as wide as possible if you think that there are risks, and there are risks. These are the two fronts on which, I think, action is required, quite apart from the regulatory market development, market practices, which are very vital.

Session 1: Questions and Answers


Q: How soon could the gold bank be established?

A – S.S. Tarapore: As a private citizen, unlike the active participants in the audience here today – who know more than I do about what may happen – all I can do is make a suggestion. In 1992, it came very close to being set up – this is not privileged information. In M. Singh’s budget speech of February 1992, it says that, “in the current year we intend to set up a gold bank. The reserve bank has been authorised to start work on that.”

The gold bank would not try to do what you are doing; it would try to do other things. To my knowledge, there is a maturity mismatch periodically in any financial activity for which you use refinancing, borrowing and other arrangements, and I believe that you would also face maturity mismatches in the borrowing and lending of gold. You therefore need some place to go to, such as a refinancing agency, or to the banks, which are trading in gold.

Regarding the issue of reserve requirements, the central bank would hopefully look at its own experience in setting up a discount and finance house and securities trading corporation, and then look at developing it into 19 primary dealerships. These are non-banks to whom you do not then raise the issue of reserve requirements still to come in. As it is an organisation trading in gold, it sidesteps the whole issue of reserve requirements. That is not to say that the gold bank should have its own prudential notes. In the case of the organisation I now deal with, irrespective of what the Reserve Bank would or would not want us to do, we follow very strong prudential norms, much stronger than those of the banks. Our capital adequacy ratios are significantly higher than those of any Indian bank. The point is not that the gold bank can be reckless because it doesn’t have any reserve requirements – the gold bank would follow its own prudential norms.

The hesitancy of whether to support the idea brings me back to a very relevant analogy about primary dealerships. The first thoughts of banks were about their treasuries and the fact that the discounted finance house would be set up which would take away their treasury business. It’s not a bank, it’s developing the market by offering facilities which the banks don’t have but which they need.

Q – Kamal Naqvi: Referring to further liberalising imports of gold, I was wondering if you would extend that to exports also out of India, from banks and others?

Secondly, in terms of the gold deposit scheme, what’s your view on having an amnesty to encourage interest in such a scheme?

A – S.S. Tarapore: Firstly, amnesty issues have greater repercussions. Looking at amnesty to be the basis for commercial activity is not desirable. In terms of what the authorities might do, the reality is that they are not in a hand-to-mouth foreign exchange position where they want to mobilise money for imports but cannot pay their bills urgently, so they have to arrange an amnesty. Amnesty is not the issue. Basing an amnesty on legitimate gold trade, does this allow total free trade?

If a gold bank has been given unfettered right in the first instance to do as it pleases, then other agencies would have the right to follow suit. There may be times when it’s valid to both import and export gold, but we should not regulate the market for gold. If it makes commercial sense to export gold, for example, then it should be permitted. One has to work hard for every aspect of reform; it can’t just come about on its own.

Q: Is there a need for international quality assaying and hallmarking in India? If so, how can the government and commercial banks participate in this to motivate international assaying and hallmarking organisations to set up their operations in India, realising both the huge domestic and export market for jewellery?

A – S.S. Tarapore: I may be wrong in this, but as far as I know, the bulk of the Ten Tola bars are not international standard.

A – S Murray: Ten Tola bars are not Good Delivery. They may be produced by Good Delivery refineries, but a Good Delivery bar is 400 ounces, so they are not.

Session 1: Questions and Answers


A – S.S. Tarapore: If India is to integrate with international markets; its goods must be up to international standards. The question is not to achieve this in one day, but to improve one’s standards.

***

Questions for Paul Walker

Q – Simon Weeks: What sort of price, on the upside, do you see as being attractive to producers this year?

A: That is an interesting question. Our feeling is that, given the current sentiment in the gold producer community, if the price were to move significantly higher than the present price, then you would probably see most producers still staying out of the market. Whether the trigger is significantly above $400 before the producers decide to get back in is anybody’s guess. Certainly, the current philosophical attitude is that [gold producers] are not going to lock in prices, even as they move up – the contango has been against it and the shareholders are against it. From a producers’ viewpoint, for those whose salaries are linked to share options and thus, to share prices, the share price gets punished if a company is seen to be aggressively hedging. I believe that, as a general rule, the producers will stay out of the market even at fairly significantly higher gold prices.

Q – Bob Takai, Sumitomo Corp: Because of the Washington Agreement, European central bank selling of gold is capped to some extent. How do you see the possibility of other central banks selling by taking advantage of this rise in the gold price?

A: We do anticipate that there will be some price-sensitive selling by central banks outside of the central bank gold agreement countries and this is due to those central banks who, according to our information, are holding “trading” accounts of gold as opposed to strictly reserve accounts of gold. Over the years in a number of countries, we have seen that when the price is right these particular banks have been strategic sellers of metal, and when the price is lower or not right, they have been happy to be strategic buyers of metal. A couple of countries will act as swing factors in terms of the little bit extra of central bank selling over and above what’s coming out of the gold agreement countries.

Q – MMTC Ltd: If central banks behave cleverly by taking advantage of the higher gold price, by the same logic, shouldn’t sales of scrap also be higher, not lower as you forecast?

A: The reason for that is that scrap tends to be particularly responsive to changes in the gold price. Therefore, if the gold price were at $270 and it spikes to a level of $290, for example, there will be a flurry of gold scrap activity. And if the gold price stayed at $290 after a period when people were selling back gold jewellery, the price tends to die down and go back to almost a trend level of scrap, which is a fairly constant figure in all of the markets that we look at. I would even surmise in the context of the Indian market, that the levels of scrap – i.e. people selling back old jewellery for cash – tend to revert to a mean level of scrapping activity. If the gold price then falls back to $270, you would see a fall in the level of scrapping activity and, after a period of a few weeks, the base level of scrap would return. Therefore, in the context of the central banks and those swing central banks, which we regard as price sensitive, they will sell and that is, perhaps, relative to not having sold anything in the previous period.

In terms of the scrap market, if the price fell from current levels in the $360s range to our forecast levels of $330 – $340, the market will tend to revert to the normal level of scrap. An 11% decline would bring it very much in line with the base level of scrap. We have seen that in the Indian market. Judging by the last 15 years, we would expect to see average levels of scrapping revert to that norm and that decline that we have seen will come about. ■


Date post:	21-Jul-2020
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times

1a. Chairman's Opening Remarks - LBMA ND 2003 · The LBMA Indian Bullion Market Forum – New...

Documents