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Trading Symbol TSE:CCM
NEWS ANNOUNCEMENT ---------- FOR IMMEDIATE RELEASE
Transcript of Conference Call featuring Frank Veneroso
May 4, 1998
Vancouver, British Columbia, Canada, May 4, 1998....We would
like to apologize for the delay in providing this transcript....
Mr. Veneroso had been taking care of his mother who has since passed away.
Our most sincere condolences to him and his family.
CANARC / VENEROSO CONFERENCE CALL
Robert: Ladies and Gentlemen, this is Robert Carriere along
with Mr. Bradford Cooke. And we would like to thank you for your
interest and welcome you to our second Canarc conference call featuring
Mr. Frank Veneroso. Mr. Veneroso will be speaking for approximately
30 minutes on the metals markets and on completion of his speech we will
open up the lines for your questions and comments. Two points that
I would like to bring to your attention. First of all, the lines
that you have come in on are going to be muted and you will not be heard
until Mr. Veneroso has finished his speech so feel free to have some questions
or comments at that point. And secondly, this conference call will
be recorded and a transcript will be made available to those who would
like a hard copy, but if you have access to the Internet it will be on
Canarc's website (http//www.mcomm.com/canarc). Now I would like to introduce
Bradford Cooke, President and C.E.O. of Canarc Resource Corp.
Brad Cooke: Hi, welcome.
This is our second go around at having Frank Veneroso featured on the Canarc
conference call .Our last one in early December was a big success.
Frank had made a number of calls in gold and silver markets over the last
several months that I think caught peoples' attention and we wish to continue
today with an update on the dynamics of the precious metals. Through
the rest of the year, I think, Frank will have very interesting comments
on recent developments and before I hand over the conference call to Frank,
I just wanted to say a couple of words on Canarc. We also had some
significant new developments in the company. Last week for instance
there was a major pro-mining breakthrough here in British Columbia that
very positively impacts our New Polaris project near Atlin, B.C.
Last month, we also launched the Mexican silver subsidiary in the company.
Last, but not least, we have seen our working capital rise significantly
since the beginning of the year which is probably one of the very few resource
companies to accomplish that. I'm not actually going to speak on
Canarc but I will be opening the floor to questions after Frank completes
his presentation and while most of the questions should be directed towards
Frank. If any of your have questions on Canarc or with regards to
the new developments in Canarc please feel free to ask me at that time.
So without further ado. Frank Veneroso is a well known and well followed
precious metal researcher. Frank sells a research service on the
precious metals and other market sectors. He has a prepared proprietary
research on gold flows in particular. In our December conference
call Frank had stated quite poignantly that there was mad dog central bank
selling in the market place and that when it abated there should be a sling
shot rebound in the price of gold. Just last week we saw an announcement
by the Belgium Central Bank that they had completed a three hundred tonne
gold sale. I think this is clearly an indication that Frank knows
what he's talking about and that this sling shot rebound could in fact
be at hand this year. Frank, with that I would like to turn this
call over to you.
Frank: Okay. Thank you, Brad. I guess I should
start by relating what we are going to say today to the last conference
call we had, which was around the 11th of December. The gold price
was testing the 1985 low. I think we were around $282 that day.
What I said at the time, was the following: There was heavy European
Monetary Union (EMU) related central bank selling throughout '97, including
the fourth quarter. This had created a great deal of bearishness
in the market, which was encouraging short sales by speculators and hedging
by producers, which were adding pressure on the market. And lastly
there was the Asian crisis, which was a negative for gold in that it was
causing liquidations of gold by investors and commercials in Asia and it
had severely reduced final Asian demand for gold. The combination
of these three things created the gold bear market of 1997.
We said at that time that the motivation behind this selling
by some European Central Banks was that they wanted to eliminate non-interest
bearing gold from their reserves before the creation of the European Central
Bank because they knew that the more pro-gold German and French governments
who would dominate EMU and who would assume control over all the reserves
in the European Central Banking system would prohibit gold sales at the
time of the creation of the E.C.B and probably for a year or two thereafter.
So, if they wanted to get gold off their books and put interest bearing
assets on it, they would have to do it before the end of April or the beginning
of May when the countries would be chosen and currencies would be fixed
forever. At the latest, they would have to complete their gold sales
by the end of the year with the creation of the ECB.
I suggested then that the selling Central Banks were probably the Dutch,
possibly the Belgians, possibly the Portuguese. Since then there
has been a lot information to corroborate those assertions. First
of all, as Brad has said, the Belgians announced they sold three hundred
tonnes. They sold the three hundred tonnes to other Central Banks.
I'm sure they did so in a first pass, but most people in the market think
at least a portion of the Belgian gold was sold into the market by the
Central Banks who bought from Belgium.
I believe that the Dutch have been major sellers as well.
The Dutch had a lot more gold than the Belgians. The Belgians it
seems sold their gold down to a sort of a minimum. They have a proposed
one hundred and thirty-five tonne coin program which begins in 1999 and
will go for a period of years. And they have to make an allocation
of gold to the ECB. All this may require several hundred tonnes.
So I think they sold down to three hundred tonnes and no further to meet
those two requirements.
The Dutch have a similar motivation - basically to get the gold
they hold converted into interest bearing treasury securities before ECB.
To do so, they will have to sell quite a bit of gold - perhaps as much
as 800 hundred tonnes. They had more than a 1,000 tonnes at year
end 1997. They will need some for their contribution to the ECB.
I believe they were significant sellers in the first half of 1997. I think
they continued to sell into the second half of 1997, and they may have
more to go.
There are also rumors that Portugal is a seller. The Portuguese
deny it. But in this business it has turned out that the old adage
"when there's smoke there's fire" has worked. Where there has been
a lot of rumor, it's turned out that those rumors have tended to be correct.
So though the Portuguese have denied repeatedly that they're selling gold,
these rumors may indicate that there is some selling being done as well
by the Portuguese. Some dealers have suggested that there are more
announcements of official gold sales to come and that they should come
in the not so distant future. That would suggest that the Dutch and
maybe the Portuguese are more or less complete with their sales.
On the other hand, Mr. Terry Smeeton, who is in charge of gold and foreign
exchange at the Bank England, has said that the European Central Bank selling
may persist beyond the end of April when the currencies will be fixed forever.
These sales will end, however, before these currencies get exchanged for
Euros at the end of the year with the introduction of the Euro. This
would suggest that the remaining EMU related selling has met delays and
that one or more European central banks have been selling and haven't been
able to get all the gold off that they wanted to. They will have
to continue to sell beyond the end of April in order to be able to achieve
I'm a little surprised by this. We have had information
for some time that the dominant Central Banks of France and Germany wanted
the European Central Bank selling to end by early May. In the subsequent
period in which the currencies will be fixed there will be, in a sense,
a new ERM and there will be many months to go before these currencies are
converted to a single Euro. So this will be a testing period.
We have been of the opinion that there has been a strong preference on
the part of the European Central Banks to not let anything occur that could
cause speculation against those fixed exchange rates. That might
involve no major changes in reserve management.
Now, the few European Central Banks that have been selling have
been, in a way, rogue sellers. There was an agreement reached in
early 1997 after the gold price broke to not sell at low gold prices.
This was reflected in a statement made by a high-ranking official of the
Bank de France in June at Prague in which he said that fears of European
Central Bank selling were greatly exaggerated and that even those countries
which had sold - meaning the Dutch and the Belgians - had agreed that it
was counterproductive to sell at low prices. Even though he said
this, the selling probably resumed in late June or July. So it is
our opinion that there was some kind of agreement and then some central
banks - the Dutch, the Belgians or whoever else - decided to break with
that loose agreement. Now, with that attitude, they may be willing
to sell beyond the end of April when the currencies will be fixed, even
if the French, Germans, and Italians would prefer that it wasn't done.
So it is unclear how far along we are in this process.
I think there is a very good chance that the selling will come to an end
by late April. But there is a chance that it will persist after that.
In any case, we now know what the motivations of these selling central
banks are. We have an idea who the sellers are and what the process
is. Even Terry Smeeton of the Bank of England, who has said some
very negative things about gold and the prospect for European Central Bank
selling over the long term, has made a statement that, by the end of year
with the introduction of the Euro, the European Central Bank selling will
end for a year or two at least. So we know that we have an event
here that has a timetable. That timetable could end at the end of
April, it could go after that, but it is quite definite. It will
end by the end of this year.
We had other indications about what will happen in Europe regarding
gold. Peter Munk attended the meetings at Davos. He discussed
what he found out in a conference call that Barrick had when they discussed
their year end results. In addition that there were 11 other major
producers at those meetings. Several of those producers have come
out and made statements very similar to that of Munk. In general
they have said that the European Central Banks now understand that lending
and selling gold and bearish dealer talk about their activities has hurt
the gold price more than they realized it had. They would take more constructive
steps in the future, including indicating that the threat of European Central
Bank selling has been greatly exaggerated. There will be some positive
announcement about this. We are getting some indications now what
that announcement might be about. Over the weekend, Governor Antonio
Fazio of the Central Bank of Italy said that it was likely that the ECB
would hold in its reserves as high or higher a percentage of gold than
the Italians have in their reserves. Gold accounts for 30% of the
Italian reserve position.
Although a final decision on the share of gold in the ECB has
not been made, the European Central Banks who will dominate the ECB are
the French and Germans. They hold a great deal of gold. They
realize that fears of European Central selling have greatly depressed the
price of a significant asset for them. Since they have too much sell,
since their body politics are pro-gold and don't want them to sell, they
are moving in the direction of a high ratio of gold in total ECB reserves
in order to foster public confidence in the new Euro and raise the price
of this significant asset for them.
I should comment a bit on this whole issue about the ECB and
the gold reserve position in the ECB. The ECB will be a central organization,
a central institution like the Federal Reserve Board of Governors.
In addition, there will be a set of country central banks that will be
related to the ECB somewhat the way the district reserve banks in the United
States are related to the Federal Reserve Board. However, the district
reserve banks in the U.S. hold no reserves. The National European
Central Banks will hold most of the System's reserves. Only 1/5 or
1/6 of the reserves of the European System of Central Banks will be transferred
to the ECB. So what really matters regarding reserve management in
the System of European Central Banks will be the composition of the reserves
at the level of the country central banks, not at the level of the ECB.
The ECB might be the first line of defense for any attacks on the Euro.
Therefore, one would expect the ECB to have more liquid reserves than the
national central banks. You could make a case that the share of gold,
which is less liquid than US treasury bills, should be less in the ECB
than it would be for the System as a whole and for the individual national
central banks. So I've often regarded this issue of what will be
the share of gold in the ECB as being a symbolic issue more than a real
issue. What really matters is what will be done with the gold reserves
at the country central bank level.
Now, the management of the reserves at the country bank level
will pass from the individual country central banks to the central organization
- the ECB - with the creation of the ECB. The ECB will determine
what the System's overall gold reserve position will be. The System's ratio
of gold to total reserves could be much higher than the ratio of the ECB
itself. Fazio may be suggesting that the ECB should make a symbolic
move by having a high ratio of gold, even if the ECB will only have 1/5
or 1/6 of the total reserves of the System.
Let me go on to the other shock that hit the gold market last
year and depressed the gold price. First, there was the European
central bank selling, not all of which has been yet disclosed. Second,
there was a lot of short selling that was fostered by fears of European
central bank selling. Early in 1997 it was hedge fund selling that
dominated. By the end of 1997 it was producer hedging that proved
to be the more important pressure on the market. We believe that
the hedge fund short positions peaked around September and probably went
down towards the end of the year. They have gone down further since the
beginning of this year. By contrast, the producer hedging built throughout
the year. In their preliminary work, Gold Fields Mineral Services
is carrying a number of about 400 tonnes of producer hedging. The
data that is coming from brokers in Australia suggest that the Australian
producers alone may have hedged 400 hundred tonnes net in all of 1997.
Preliminary data on the North American producers suggest something like
200 hundred tonnes of North American hedging. Ted Reeve has not been
around, so I haven't gotten what his year-end survey has come up with.
In addition, I believe there has been hedging out of Africa. In South
Africa there was a large buy back of the Western Areas hedge, but the dealers
suggest that other producers increased their hedges by much more than the
reduction in the Western Areas hedge. So there was some additional
hedging by the South African producers. We think there was some small
hedging by others such as Ashanti. It is possible that producer hedging
last year was on the order of 700 tonnes. That may be too high, but
that's how the numbers look so far. That is a very large number.
A lot of it was done at very low prices toward the end of the year.
No doubt this reflected fears of endless European Central Bank selling.
The meetings at Davos between the producers and the Central Banks
has changed sentiment within the producer sector. Most of the major
producers that attended those meetings feel there will not be endless large
European Central Bank selling and have made statements to that effect.
So we would expect that there will be much less producer selling this year
because of this changing view regarding the outlook for official sales.
The same thing is happening among hedge funds. The hedge
funds who were told at the end of '96 and early '97 that there would be
a lot of European Central Bank selling successfully and rightfully went
short. They found that the information provided by the dealers proved
to be correct. Now, they have been told by some dealers who formerly
were bearish that there will be much less Central Bank selling this year
and next year and that some positive statements about gold's role in the
European System of Central Banks will be made. So we believe that
the hedge funds have actually been reducing their short positions.
The computer funds who operate off pure technical systems and not off of
fundamentals have remained quite short, but the hedge fund sentiment has
changed and I thing it will continue to change. So we do not expect
the short selling of 1997 to be repeated in 1998.
This means that, this year, we will not have the Central Bank
selling that we had in 1997 nor will we have the producer and speculator
short selling that occurred in 1997. What, then, has been holding
the gold price down? First, there is perhaps one or more European
Central Banks that are still in the process of selling, even though there
is a timetable at work and it will end. But in addition there has
been the Asian crisis. When I talked to you in December, I estimated
that the Asian crisis had depressed the gold price by perhaps $20 or more.
I estimated that, at an annual rate, Asian demand probably declined relative
to where it would have been by 300/400 tonnes. The estimates that
I made were based on my estimates of declines in demand for gold as jewelry
and bar based on historical precedents. What has in fact happened?
There has been far more liquidation of stocks held in Asia then I expected
and that there were any historical precedents for. A part of this
liquidation has been liquidation of commercial inventory held in jewelry
fabrication and distribution. The severity of the credit crisis in
these countries has forced all fabricators and distributors to curtail
inventories more than they had in other currency crises and in other periods
of credit restraint. Secondly, there has been an organized effort
to mobilize investor gold in Korea and that effort has proved to be very
successful. The campaign began in early to mid January and it continued
into the middle of March. My guess is that they mobilized 270 tonnes
of gold and sold almost all of it shortly after they mobilized it.
That is a big supply shock to the market. It has raised our estimates
of overall investor liquidation from the crisis way beyond anything that
we had initially imagined. It was the source of the bulk of the pressure
on the market from mid January to mid March.
That shock has largely passed. The amount of gold that
was delivered to the campaign in Korea fell off sharply in late February
and into early March. The campaign has been terminated. There
was a similar campaign to mobilize silver that has not had much of response
at all. We believe that the Korean supply shock to the market is
Most of the investor liquidation in Thailand occurred in the
second half of last year. The Thais have launched a similar campaign to
that of Korea that has met with a fairly feeble response. There has
also been an abatement of the liquidation of commercial inventories in
the jewelry fabrication and distribution business in Asia. That is
surely the case in Thailand, since the crisis there is now nine months
old. Even in Korea, where the crisis hit later, we're starting
to see the end of liquidation of industrial inventories and the beginning
of imports of some industrial materials. That would suggest that the commercial
inventory liquidation process in gold is coming to an end.
For Asia overall we estimate that Asian demand fell at an annual
rate late last year and early this year by more than 1,000 tonnes.
That's a combination of investor and commercial inventory liquidations
plus the decline in final end use demand. We believe this has knocked
about $60 off the gold price. Two thirds of these pressures have been liquidations
of commercial inventories and investor holdings and only one third has
been due to a fall in end use demand . Once these inventory liquidations
and investor liquidations run their course, which we believe they mostly
have, 2/3 of the adverse impact the Asian crisis has had on the gold market
should be over. With a lag, that should result in about a $40 appreciation
in the gold price . The recovery of end use demand will take a lot
longer. These Asian currencies are coming back. The Korean
won is above 1400. Credit is starting to come back to these countries.
They are all showing large current account surpluses. Their reserves
are starting to build. We do think that there will be a recovery
in end use demand, but it will be slow to begin with. My guess is
that we won't see a full recovery until sometime in 1999. But for
1998 the bulk of the adverse impact coming from the liquidation of above
ground gold stocks from the region should be over by mid-year.
Let's look at all this in review. We have had EMU related selling.
It's still ongoing. It has a timetable. It will end.
It may end by the end of April, or it may end later. It may run on
towards the end of the year, perhaps at a diminished rate. We have
a change in perception by the short sellers in the market - that is, the
producers and the hedge funds. Sales by both will also abate, and
probably significantly, this year. We will probably get some further
announcements of the end of other European Central Bank sell programs and
some positive statements by the major European Central Banks - the French
and Germans - about the role of gold in the ECB which should further bolster
sentiment and reduce short selling by the bears of last year. Lastly,
we would expect that 2/3 of the negative impact from Asia will have run
its course shortly and certainly be the middle of the year.
As the special selling pressures that all came together at once
last year abate, the gold price will lift. It should recover over
a period of 6 months to 12 months, retracing most or all of the decline
that occurred in 1997. Remember that in 1996 and 1995, by our numbers
- not by Gold Field's numbers - the gold market traded at an average price
of $385 - $387 with a flow of Central Bank gold of approximately 1,000
tonnes annually. I believe there will be smaller Central Banks that
will be sellers on a scale up. I believe at higher prices the producers
will be serious hedgers. These two factors together might constitute
an annual flow of 1,000 tonnes of Central Bank gold. With a 1,000 tonne
annual flow of Central Bank gold from those two sources, the market will
tend to clear at the prices that it cleared at back in 1996 and 1995, which
was in the $385 - $387 area. So we think that, when the especially
intense selling pressures of 1997 abate, even though there will be Central
Bank selling and producer selling, we will see the gold price trading back
in the range where it traded in the 1995 and 1996 period.
Longer term I believe the Central Bank selling and the producer
hedging will run its course. I think it is going to be clear that
the gold market is in a very large deficit. People are going to be
aware of what has happened in the palladium market, where a very large
deficit which was fed by Russian stock liquidation came to end and drove
the palladium price back toward the 1980 high, and that a similar dynamic
could occur in the gold market. Such a process is occurring in the silver
market. Warren Buffet's purchase of silver is making people aware that
a very large deficit in the silver market fed by above ground stock liquidation
cannot go on forever. The abatement of that flow of silver will lead
to a much higher silver price. People will realize a similar phenomena
will occur in the gold market eventually .
Once the producers reach a higher level of hedging and saturate
their demand for hedging, and once the smaller Central Banks that are left
to sell get their selling done, then the gold market will see a lower flow
of Central Bank gold. Then we will see a break out in the gold chart
to much higher prices. That might take quite a while. I think
a lot of producers feel the lesson that was learned from 1997 was that
you had better be hedged. Many of them feel under-hedged, so saturation
of producer hedging demands may require quite a fair bit of additional
hedging. This will be absorbed over a period of, let's say, a few years.
That will set the gold market up for a major break out above the trading
range that persisted in the 1990's.
I have been asked to make a few comments on silver and I will
quickly do that. Buffet's principle reason for buying silver is that
the silver market is in a deficit, the deficit is unsustainable, and the
above ground stocks are dwindling. We have some information that
the above ground stocks in depositories in Europe are less then is generally
thought. The market has been in a significant backwardation; that
is, lease rates on silver have been quite high. That is really unusual
in silver because there are large investor holdings. High lease rates
should cause investors to bring their metal into the market in order to
earn 15% short term, which is the current lease rate on silver, in addition
to the original reasons they wanted to hold silver.
You get backwardation in commodity markets when you literally run out
of stocks. In the case of silver we know there are significant above
ground investor holdings, so to see lease rates at these levels and to
see them persist like this really suggests that stocks may be much lower
than most people think.
Why has the silver market had this recent big re-tracement?
The reason is the backwardation, the reason is the lease rate. Whenever
you have a very tight physical market and you get this backwardation, you
get these high lease rates which draw metal out of the woodwork.
People bring metal to the market to lend it out, they provide metal to
the market through lending. In the short run this adds to supplies
and brings the price down. After that metal is absorbed as the market's
deficit persists, the market will tend to lift again. The second
time around it will tend to lift more dramatically, because you have already
drawn a lot of what you can draw out of the woodwork on the first pass.
That is the process that is occurring right now. The backwardation,
on this first pass around, has drawn metal out of the woodwork. This
metal is being absorbed by the deficit. That will start to bring
available physical metal supplies down again. The deficit will persist
and prices will go back up again . When silver goes back up the second
time around there will be less elasticity of supply. The shelves
will be barren. Metal will have been drawn out of the woodwork.
The price will make higher highs, and Buffet will turn out to have been
There is a larger volume of silver loans out there then people
think. The official estimates by the Silver Institute are much too
low. Gold Field's estimates are on the order 60 - 100 million ounces.
The actual numbers are probably in the hundreds of millions of ounces.
In effect, there are a lot of commercial shorts out there. These
commercial shorts turned out be a very important source of impetus to the
upside in the palladium market. A lot of palladium was leased.
When the lease rates went up initially, some people weathered the crisis,
hoping high lease rates would abate. However, over time they couldn't
sustain those high carrying costs and they tried to buy back the metal
that they leased. A similar thing is going to happen in the silver
It is our information that there has been less silver in the
depositories in Europe than is widely thought. This means that the
deficit in the silver market is larger than the consensus believes.
CPM has higher estimates of the silver market deficit than Gold Fields
and the Silver Institute. CPM's estimate was 214 million ounces last
year. The Gold Fields and Silver Institute estimates will probably
be about 60 million ounces less. Over the long run, a larger deficit
in the silver market is a positive for the silver price.
For further information, contact:
Manager of Investor Relations
Tel: (604) 685-9700