DAILY NEWS Nov 14, 2012 4:00 PM - 0 comments

GUEST OPINION: Pierre Lassonde on gold, Part Three

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By: Pierre Lassonde, chairman, Franco-Nevada Corporation
2012-11-14

From his keynote address to the Denver Gold Forum, September 2012.

Now, let me give you the flip side of why you want to be in this business, and that’s the demand side. Look at what’s happened to demand over the last 10 years. In dollar terms, we have gone from an industry that had a terminal demand of $30 billion to over $220 billion last year of terminal demand; an increase of 10 times over 10 years. Now, what other industry has had such an incredible growth rate in dollar value over the last 10 years?

We have a phenomenal run. And also, when you look at the composition of demand, it’s the best we can ask for. Before it was 90% jewelry, the central banks were sellers, our big companies were hedging, selling out under the shareholders and the only other people who were buying was industry for your cell phone.

Look at it today: about 40% jewelry, 40% investment demand, central banks are back buying about 15% and then another 5% to 10% of industrial demand. A really well balanced, diversified demand at a record level.

Now, if you just kind of look at each component very briefly. Look at central banks. Of course for 20 years they’ve been selling their gold. They had no clue why they held it in the first place; now they’re learning. Central bankers are relearning that all paper currencies are suspect. Every single one of them in today’s environment, every single paper currency is suspect.

And what are they doing with cash? Today cash is trash; you’re getting nothing for your cash. And you look at the euro, you look at the dollar, you look at the yen – everywhere you look they’re suspect. So, what are they doing? [The banks are] buying back gold.

Oh, do I love it. I absolutely love it. And if you look at how much they can buy and what is likely to happen, when the ECB (the European Central Bank) was created in 2000, after doing all kinds of work on how much gold they should own, they decided that the right proportion was 15%.

If you just use that number for the bricks you want central banks to hold and say, “Okay, you guys want to be in the club of real central bankers and you got to own 15% gold,” essentially they would have to buy 17,000-plus tonnes of gold which, at 1,000 tonnes a year, which represents 40% of today’s production, they would have to do that for the next 17 years. It’s looking good, looking good.

The next part of it is investment. As you all know, they launched the gold ETF in November ’04 and since then the gold ETF have ballooned to in aggregate $129 billion. But you know that that $129 billion only represents 8% of all the gold that is held personally as investment because the total number is closer to $1.2 trillion.

That’s a lot of money. But that’s nothing because that $1.2 trillion only represents about 2% of (investible) assets minus corporate agency debt, money market fund, commodity, real estate, hedge fund. If you add it all up, it’s less than 1%.

But then you look back at history. I remember when I started going to Switzerland in the late '70s, early '80s, every portfolio manager had something like 5% to 10% of their portfolio in gold. Let me tell you something, that’s where we’re going. We’re going back to the 5% to 10%.

And to do that, you’re going to have to probably take out 66,000 tonnes of gold and if it happens over the next 10 to 15 years, where is that gold going to come from? I don’t know. But I do believe that it’s going to happen.

Now, when you look at the aggregate demand, where is it coming from? Warren Buffett said you shouldn’t buy gold because only people are buying it to sell to bigger fools. They’re going to sell it at a higher price. Is he wrong! He’s just so dead wrong.

Look at this year. China and India in 2002 were at 23% of the market. Today they are 47% of the market. That’s one-third of the world population going from $600 a day to $3,400 a day in GDP. And when you look at the next 10 years and you look at India, the growth in gold consumption is directly related to GDP growth and I think it’s going to continue in India and I think it’s going to continue in China.

And you’re looking already at 2,000 tonnes of gold a year and I think it’s going to continue to go higher and they’re buying the gold to put in their earrings and bracelets and jewelry, but also some of it in investment. So, my feeling is good solid growth, fundamental demand from these countries.

Tomorrow: Pierre Lassonde on the super cycle.

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