In this interview, George Gero, vice president global futures RBC Capital Markets, speaks with JLN Metals Editor Chris McMahon about the new dynamics of the precious metals markets, central bank purchases and sales, the rise of exchange traded funds, the possible imposition of speculative position limits and the role of the media in pushing gold prices higher.
McMahon: What do you think will come of the CFTC hearings on speculative position limits?
George Gero: “I have no idea what’s going to come out of that.”
Do you think those concerns are well founded? We have all those groups like GATA making a lot of noise.
“I think the unintended consequence always has been pushing more business offshore. That’s what I’m concerned with. The transaction tax, 60/40, spec limits, all these things basically are helping to export business. Trading will increase offshore and that, to me, is the concern. I am interested in trading here. The market has become very international and we are no longer leaders. We are followers. When you get up in the morning, you already know where gold has traded elsewhere and why. TOCOM does a good business, they do more platinum than we do in the U.S., Shanghai does more copper than COMEX. Then you have the LME [London Metal Exchange] and the LBMA [London Bullion Market Association], so the markets are very international and growing elsewhere, as well as here. It started with Sarbanes–Oxley, where we exported business offshore and every time we decide to clamp down on a market, the market just finds somewhere else to do the business. There are so many people following gold who never looked at it before. The one thing that I want to comment on is that price seems to make news, not news making price.”
What do you think is behind that?
“Sensationalism, media, hype! Gold traded at $1,000 became a big media event. It wasn’t a function of, ‘gee, the dollar went from 90 cents to $1.30 against the euro.’ It’s ‘GOLD TRADED AT $1,000!’ The price of gold is a political and economic barometer.”
How has the culture and custom of the gold market changed?
“It has become more international. It has responded to new economic and geopolitical fundamentals, more so than in the past when it was strictly an issue of the U.S. dollar going up or down. And today, gold buyers are mainly attracted to ETFs, for various reasons in various countries. In the U.S., the ETFs, like GLD and IAU are taxed as collectibles by the IRS, so long-term holders tend to buy them through tax protected accounts, IRAs and retirement plans.”
I thought the biggest appeal was that ETFs trade like stocks, and that they would appeal to day traders.
“Yes and no. The major appeal is for buy-and-hold people because, number one, you have to buy them without leverage. You basically have to put up 50% margin or full money, so you are not shaken out as you are in the futures market. When you have a 5% correction in futures, everybody pushes the ‘sell button’ because the sell stops go off or margin money may be due; you are not subject to the rollovers that you are in futures.”
It sounds like you’re a fan of ETFs.
“I am a fan of both, depending on who you are and what you are. But you get more bang for your buck in futures. And then of course, we [had] position limits at the CFTC; everybody blames the ugly speculator, but the speculator isn’t really ugly, nor is he a speculator. And you have less than 5,000 open interest in copper. So, where the heck is the big speculator?”
And everybody has, or is getting, a gold contract lately.
“Exactly. And some of the contracts have local London delivery, like GLD, which could be marginable at the CME, which brings about arbitrage. You have futures, you have options, you have the ETFs, so Goldman Sachs feeds them into the computer, and there are a lot of big players, Scotia Bank, Bank of Montreal, all the usual suspects are trading.”
Just in the last couple months, it seems to me that more metal futures are going to delivery. Is that your impression?
“No. Not in the metals. I haven’t seen that in copper, I haven’t seen it in silver and I haven’t seen it in gold. In fact we have very few deliveries on the COMEX. If you look at the numbers, open interest is close to 500,000 in the gold, 123,000 in copper and 118,000 in silver. And if you look at the deliveries, you have less than a couple hundred in each in segment. They don’t go to delivery. They are really just price hedges. They don’t go to delivery because delivery is expensive and the cash-and-carry business isn’t there. Interest rates are so low, you can’t make money with the cash-and-carry. Right now, April/June is like 110 bid at 120. That’s after expenses, commissions, storage, or whatever. There’s no money in it. You have a rollover, that’s a big rollover because for the 120 points they will rollover and abandon and not take delivery and redeliver.”
The conventional wisdom for so long has been dollar down, gold up; dollar up, gold down. I believe that to be less true these days with the European debt crisis and the decline of the pound. What’s your impression?
“The debt crisis has brought several new ideas into it. The first instance of the media publicizing the debt crisis, you recall, gold dropped $50. And the reason for the drop were the two major agencies that they would have called in for the debt crisis: the ECB or the IMF. The IMF has had lots of experience dealing with debt crises in various countries. The ECB has less. The IMF, however, immediately thinks of selling gold to fund bailouts. And indeed, the IMF had been lobbying Congress to sell 400 tonnes of gold for a couple years. They finally sold 200 tonnes [to India for $6.7 billion in November 2009], leaving 191.3, which they probably are selling or have sold. If it’s the ECB, they usually wait to sell their gold during the September sales pacts, when members of the Central Bank Gold Agreement are able to sell up to 400 tonnes of gold, if they wish. So there’s the difference. Everybody said, ‘the IMF is going to come in and sell the gold.’ That’s why you went down $50, when in a crisis mode gold might have gone up normally.”
So there’s this sale looming on the horizon…
“We don’t know if the sale has happened, or hasn’t happened.”
Would they do it and not announce it?
“Sure. They sell it on the physical market, they don’t sell it on exchange.”
When they sold to India, it was a big deal.
“They also sold 10 metric tons to the Central Bank of Sri Lanka and two metric tons to the Bank of Mauritius in November. Since then I don’t know what happened. Maybe nothing.”
Everyone was up in arms that China would be the buyer. I thought that was foolish; no way did I think that was that going to happen.
“I didn’t either, I think China is trying to cool things off. The pundits were saying China wants to buy gold because it’s a great way to get rid of dollars.”
But they have a bunch in the ground, they have an endless supply of cheap labor, and they have lax environmental and mining regulations. Why are they going to buy it at a 3x premium on the open market?
“Exactly. They will talk it down if they really want to buy it.”
What are the other new dynamics?
“I see more and more people owning gold because of the popularity and ease of use of the ETFs and I see more and more professionals adding to gold positions, Paulson and Soros, and of course they have done their homework.”
There’s that Credit Suisse story about investment demand for gold drying up.
“I saw that. It was one of your most-read stories, I don’t buy it. Gold has been around since time immemorial and has been a method of maintaining purchasing power and will continue to do so. In 1932 during the great depression, a kilo of gold bought you a new Ford, Chevrolet or Plymouth and today it will buy you a new Honda, Toyota or Ford or GM. In effect it has maintained its purchasing power and that’s really the major need for gold and it’s not just in the Western world. It’s South America, the far east. In many other countries, gold is an accepted medium of exchange. It’s portable, liquid and has no political allegiance.”
And then there is the philosophical opposite: the Warren Buffet stance, that gold is dug out of the ground and then you spend time and money to process it, put it back in the ground and pay some guys to guard it. So what’s the most important factor affecting the gold market in the next couple weeks?
“I think it will be more evident after we see the Fed minutes. If we see a change in rates, that could affect various currencies, including the dollar of course. There was the raise in the discount rate. But I don’t anticipate anything with the exception of a possible difference in language. But I am not certain, that’s for the economists. People are buying gold as an asset allocation, and they have been doing that for some time. They are adding to their positions. But then, of course, you hope that it’s only 5% to 10% of your portfolio and that you never have to rely on it.”
What’s the biggest misperception about the gold market?
“There’s an awful amount of hype in the gold market and as the price goes up, momentum players are attracted to it. Those are the people interested in the moving averages and the open interest, the daily volume and higher closes. They tend to be weak holders and they are not long-term owners.