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Trading Symbol  TSE:CCM

Transcript of Conference Call featuring Frank Veneroso
Vancouver, British Columbia, Canada, December 17, 1997

Canarc Resource Corp. is pleased to provide the following transcript of the Conference Call featuring Frank Veneroso on Tuesday, Dec. 9.

DECEMBER 9, 1997

RC:     All right, ladies and gentlemen, it is 1:15 on the West Coast of Canada and we would like to thank you for participating in this conference call with Mr. Veneroso and Bradford Cooke. We would like to bring on Mr. Cooke first of all and he will give a few statements and then introduce Mr. Veneroso. The first 20 to 25 minutes will be, of course, Mr. Veneroso and Mr. Cooke. Thereafter you are very welcome to pose any questions so - Mr. Cooke please.

BC:     All right, well, I guess I'd like to welcome everybody first of all to the Canarc conference call, I think it's very timely that we have Frank Veneroso available to speak on the current turmoil in the gold markets. Before we get into that I just wanted to have a few introductory comments, some housekeeping first: Because we're on a conference call that's actually international, I would ask that everybody either put their mute button on or refrain from talking because we can all hear eachother. I guess that's the only housekeeping item really. I am the President of Canarc for those of you who don't know me and because of the recent action in the gold markets which impacts companies like ours, we felt it was appropriate to hear some original comments and research from a specialist n the gold market. I'd like to start by just saying a couple of words about Canarc's own views on the current gold market, how it impacts our Company. Basically we felt in management that there is a number of harsh new realities, not only post Bre-X but with the current price of gold and some of those realities basically are that cash and cash flow have become more important than ever. Canarc's fortunate to be a small but profitable gold producer in South America.

I think the second harsh new reality is that market financings for junior companies have all but vanished at this time and so joint ventures with major mining companies are basically back with a bang as you can see. In the last four months Canarc's been very busy on the joint venture front.

I think the last new reality post Bre-X and post low gold prices is a strong trend to quality over quantity. That is that the huge low grade capital intensive projects will tend to get back-burnered in this current gold environment in favour of smaller higher grade, and presumable higher quality, gold projects. Canarc, of course, has always believed that our main asset at Polaris being a high grade underground mine, should survive any downturn in the gold price cycle.

Last, but not least, I guess I'd like to say something about management strategy. We have been busy in the last few months negotiating joint ventures so that we can continue drilling abroad without spending our own money, but we feel fairly strongly that this is a good time to be shopping for hard assets, especially gold assets in the belief that, if we're not at bottom, we must be getting close to a bottom in the gold price cycle and that hard assets right now can literally be purchased just for pennies on the dollar. Canarc has been very busy on joint ventures with major companies. We're also very active at reviewing acquisitions and while we haven't had any deals to announce yet, we do obviously expect to say something about our acquisitions in the New Year.

I think that's all I'm going to say and without further ado, I'd like to introduce our main speaker for today's conference call, Frank Veneroso, who is a noted financial strategist in the global markets and a specialist in gold. He has followed gold as a commodity for many years. Frank also does sell a proprietary research in the gold markets on a weekly and monthly gold service and his first annual gold book is due out in January of 1998. I think, Frank, that without further ado, I'd like you to take the floor and run with it. Frank Veneroso.

FV:     Thank you Brad. Well, it's quite a day to have a conference on this subject with gold having made a new low below the 1985 low. I know everyone wants to know why it's happened and where we're going in the short run. I must say that our perspective is a fairly long one. It's a very commodity oriented perspective and we have tried to elaborate the framework that we use and the views that we have and the forecast that we make in an extensive document that we're putting out in January. It's called the Gold Book Annual. It will be coming out every year. It's a long thing, it's about 250 pages and it has a great deal of analytical detail that supports the type of commodity framework for the gold market that we have. Now, in this framework lies a very bullish long term scenario. The short term situation is much less clear because it's been a flow of central bank gold that has been depressing the gold market and it is rather difficult to assess how that flow will go over the short run.

First, I'm going to give you a little bit of the framework so you understand what's going on. Then I'm going to talk about the short run, then I'm going to run back to that framework and draw some implications for the longer run.

First, the gold market. The gold market has about four to five thousand tonnes of demand and it has about 3,000 tonnes of mine and scrap supply and the difference is the flow of central bank gold. Some of that central bank gold flow is due to outright sales and some is due to gold borrowings. Gold is borrowed by producers that hedge, by fabricators to finance inventories and by various kinds of speculators, the so-called shorts of the market. Both of these factors, outright sales and borrowings have been very important in this year.

We believe that the official data on the gold market is very much in error. We look at the World Gold Council which provides an alternative survey of demand to this official data on the gold market and we come up with a demand level of about 600 tonnes above what is generally accepted. We have done considerable work on the flow of borrowed gold and we think that this flow has been about 500-700 tonnes higher than what is generally accepted. Both of these findings support the other. We feel very very confident about our research on gold borrowings.

If we take this structure, we think that the gold market had a flow of official gold at $385 in prior years of in excess of 1,000 tonnes. We know how much the gold price will go down if you increase the supply. We understand the price elasticity of demand and from that we can draw certain conclusions about what the flow of central bank gold is at various price levels on the way down. It is our judgment that this year we probably have a flow of central bank gold that lies somewhere between 1,500 and 2,000 tonnes. Probably more than half of it is outright sales. Obviously with the price lower in the 2nd half of the year than the 1st half of the year, the flow has been more intense in the last 6 months, in particular in the last 3 months.

Okay, who were the sellers? What has caused the big break? Probably there is one major European Central Bank that has been the impetus behind this bear market. The dealers in the gold market have been telling all manner of participants in the market, be they speculators, producers or smaller central banks, that there would be a great deal of European Monetary Union related central bank selling this year, so this impetus, this European Central Bank selling, has created an accelerator in the form of a lot of other transactors - hedge funds, producers and smaller central banks - who are selling along with, or in front of, this well advertised central bank selling. Our guess is that the central bank selling out of Europe is not coming from the G-7 central banks, but from the smaller central banks. Most likely it is the Dutch or the Belgians. We believe that, in the 1st half of the year, there were a couple of hundred tonnes of unrecorded central bank sales, probably Dutch in origin. We think that around May there was an agreement by the European Central Banks to cease selling. A statement to this effect was made by the 3rd ranking man in the Banque de France, a man by the name of Jean Pierre Patat, at the June FT gold conference, when gold was around $345. I want to read to you some of what he said because I think it's important in interpreting what's going on now. He said that the European Central Banks will not sell a major portion of their gold reserves and that allegations to that effect are "devoid of all substance". He also said that several central banks in Europe which had sold gold from their reserves now feel there is no longer an advantage on selling more bullion. "The reasoning now was that any advantage was outweighed by the loss on the remaining reserves from reducing the gold price." So here's the Banque de France, this past June, telling you that these two central banks, Belgium and the Netherlands, that had sold in the past, have decided, have agreed, to stop selling because the loss of the value of the reserves that are held outweighs any gain to be had by selling the gold and putting the proceeds into interest bearing securities.

It is our opinion that sometime after June, one or several European Central Banks broke rank with this consensus, failed to live up to this agreement, and began to sell again. Now, what would their motivation be? There are two possible motivations. The one you most frequently hear about is that they want to sell gold in order to raise cash to improve their fiscal and debt ratios in order to get closer to the criteria that are needed to gain acceptance into EMU. But there's another motivation. When the European Central Bank is created, very little of the reserves of the System of European Central Banks will go into the European Central Bank. The European Central Bank will be a central type of entity like the Fed Board of Governors in Washington. Then you'll have a system of country central banks, which are the central banks that now exist, very much like the regional fed banks in the United States. In the European case, however, these country central banks will hold most of the system's reserves. Only about 15% of the reserves will be allocated to the ECB; most will reside at the country central bank level and the fiscal implications of their reserve composition, whether they earn interest or not, will be borne by the individual countries. However, once the ECB is created, the individual country central banks will lose autonomy over their reserves. The management of those reserves will be done by the European Central Bank itself and that European Central Bank will be dominated by the French and Germans. All central banks like the Dutch and the Belgians will have the management of their reserves largely dictated by the French, the Germans and the Italians.

Now the French have been very pro-gold, they have made several pro-gold statements about the role of gold as a reserve asset in the forthcoming European Central Bank. The Germans have also taken a pro-gold position in a dispute with the United States over whether the IMF should sell gold. Also this year when Finance Minister Wiegal tried to revalue the Bundesbank gold, it created enough of a public furor that there were repeated assurances that the German government would not sell any gold. Both the German and the French people had a certain affinity for gold, unlike the populations of the Netherlands and Belgium. So we believe that, with this on the horizon, some of the central banks, most likely the Netherlands, possibly Belgium, possibly one other, have been trying to sell as much of their gold as they can and put it into interest bearing assets before the European Central Bank is created, at which point they may no longer be allowed to do so by the French and the Germans who will dominate the ECB. Now, this is not just pure speculation on my part. Some noted economist friends of mine, like David Hale at Kemper Zurich, have talked to these central bankers and in general the attitude seems to be that in the immediate run up to EMU and in the 1st year or so after the ECB is created, the French and the Germans will not want the boat rocked with any major changes in reserve management. If someone in the system of European Central Banks is going to want to sell gold and turn it into an interest bearing portfolio position, they will have to do it before reserve management is passed to the French and Germans, who will dominate reserve management in the European Central Bank.

OK, what then would be the time table? When would they want to get that gold sold by? Well, the European Central Bank will not begin formally until the end of 1998 but the decision about the exchange rates that will be used for converting the European currencies into the Euro is to be made at the end of April or the beginning of May. It is the opinion of some analysts of the European scene that an effort will be made to freeze central bank reserve positions at that time. Also, it is the opinion of some that once these exchange rates are set there will be a testing period between the establishment of these exchange rates in the beginning of May and the conversion to the Euro late in the year. The European Central Banks will want no shocks that would create any pressures on those exchange rates. One might construe an announcement of a very large gold sale by a European Central Bank as having shock potential.

So, there is a chance that one or several European Central Banks that are trying to sell as much gold as they can prior to the setting of these exchange rates. Whether that is the end of this year or April of next year, we're not sure, but we do think that one or more European Central Banks are running up against some kind of a time table, trying to dispose as much of their gold as they can. This whole threat of European Central Bank sales has been so well advertised that it has brought a lot of other sellers into the market. We've seen Australia, we've seen Argentina, and we believe that there are several others. Brazil is a candidate; the IMF data suggests that they've been drawing their gold reserves down. We think there may be one or two others, several smaller central banks that have been panicked by this prospect and are selling their gold. We don't know exactly who the sellers are, exactly their motivations, exactly the timing, but we do believe the impetus is European, the sale is very very large, it has created its own momentum in the form of other smaller central banks selling, producers hedging and hedge funds going short, but we believe there is some time limit on this big impetus. That doesn't mean that, when these European Central Banks, or this one European Central Bank, is done, that there will be no more central banks selling, but the odds are that there will be less central bank selling.

I really would not be at all surprised if we wake up one morning to find out that the Dutch announced that they'd sold 700 tonnes or most of the gold that they had at the beginning of this year. This kind of thing is very unlikely to be repeated. Like I say, when it comes to the big European Central Banks I do not believe that they have been the sellers. I believe that the pro-gold positions of the Germans and the French will make any gold sales out of the European Central Banks minimal or non-existent at least for the 1st year or 2 of the European Central Bank. Now, how great could the selling of the smaller central banks be? I don't think it could really be that great because if you look at the number of central banks outside of Europe and the United States and Japan that have hundreds of tonnes of gold, there really aren't very many. And some of those central banks are actually adding to their positions. Russia, for example is one of the nine central banks that has more than 5 million oz. of gold and the Russians actually have been adding to their gold position and continue to do so. The same seems to be true of China. So, I think there could be quite a few smaller central banks that could be selling quantities on the order of tens of tonnes, maybe 100-200 tonnes, but it does not seem likely to me that in total this would generate net central bank selling on anything like the volume we've had this year.

In sum, the big impetus probably has been a big European sale, it is probably a sale being done against a timetable. That timetable probably ends either the end of this year or the end of April, possibly the end of 1998, but I doubt it. And so I think that we will see in 1998 a recovery in the gold price. Now, how much of a recovery will depend upon how much of a role hedge fund and computer fund short sales have had in this year's bear market. There's a great deal of dispute about this. My guess is that it's been pretty big, though I don't think that it's been the principle pressure on this market over the last couple of months. The pace of any gold price recovery also will depend upon the behaviour of producers. My guess is that because of the shock of this year, because of the new fears of central bank selling, we will see a considerable amount of producer hedging of any rally in 1998. So I would expect that there will be constraints on any rally that develops. Nonetheless I think that once you eliminate this big central bank sale which has been the impetus behind this bear market , the market will go up and there is an outside chance that the short position in the market is so large that you could get a violent rally. I don't exclude it.

I must say that I'm a little shocked and surprised by the amount of central bank selling that's been going on. I've worked with central banks as an advisor from 1971 to 1989. Central banks tend to be very gradualist. They tend to be very cautious. They tend to work in a cooperative way. The type of selling that we have seen in the last 3 months has been none of that. Think about it. The Italians have 2500 tonnes of gold. They have it on their books at $364 an oz.. The French have 3100 tonnes of gold and they have it on their books at $340 an oz. Marking to market these reserve assets does influence their debt ratio going into EMU. Patat of the French Central Bank made it very clear that the loss on the remaining reserves from reducing the gold price far outweighs any gain to be had from the interest earned from selling the gold, so the French and Italians must be very displeased with what is happening to the gold price. To have other central banks, particularly European Central Banks, savage the market to this degree, is really extraordinary; it represents the kind of uncooperative behaviour on the part of some central banks within the central banking community that I just find no precedent for. So we are a little uncertain about making a forecast for next year, but on balance, the odds are extremely high that the recent intense rate of selling will abate when whatever these guys are doing is completed before this EMU timetable, which, as I repeat, is probably sooner rather than later, more likely the end of this year at the latest rather than late April or the end of 1998.

OK, that's the near term, let's talk about the long term. I said to you that our views are that demand in the market has been much higher than is widely believed and the flow of central bank gold has been much larger than is widely believed. I've had this position, about the size of central bank flows, both the sales and the borrowings, for a very long time. If some of you know my work, I wrote two pieces in Forbes, back in 1995, one called "What's Holding Gold Down?" and I said "Central banks." and another one called "Brother Can You Spare an Ingot" and I talked about central bank sales and now heavy borrowing holding the price of gold down. At that time, most people thought it was far too alarmist to talk about central bank borrowing and central bank selling of those magnitudes. Now, no one doubts that in fact this is occurring, but no one's focusing on the long run significance of such large flows. I told you we feel very very comfortable with our assessments, we've documented them in great detail in this book that we're bringing out. The implications are pretty simple. If gold demand is that much higher and the deficit in the market is that much higher and the flow of central bank gold is that much higher, then two things follow: 1) the flow is likely to be unsustainable because it is so high, the rate at which bullion is leaving central banks vaults is higher than people think and therefore less sustainable than people think, and 2) if the deficit of the market is much larger than people think, when this flow abates or ends, as ultimately it must, the gold price will have to go much higher than anyone thinks in order to clear the market. The way the market clears is largely by rationing down price elastic demand to the level of mine and scrap supply. Mine supply is fairly price inelastic. We have come up with some estimates, from econometric studies done by others as well as our own analysis of past gold market data, of what the price elasticities of demand and supply are in the gold market. Applying those elasticities to the size of the gold market deficit that we believe now prevails, when this central bank flow abates you get a very high market clearing price relative not only to the current price but to the average price of $386 of the prior 3 years. So we think that, in the long run, a couple years out, you are going to see much better gold prices than most people think, as long as the biggest central banks, that is the European Central Bank (dominated by the Germans and the French) and the United States Fed don't sell gold. We think that it is highly probable that these central banks will not sell gold. The longer term, then, is actually much much more positive than anyone imagines. We've documented all of this in this book we are producing: why we believe that gold supply and demand are different than is widely believed; what the various price elasticities of the supply and demand variables are; and what kind of price results you'd get to clear the market when these central bank flows abate.

There are two other questions that I thought were important. One was "How does the financial crisis in Asia impact gold demand?" We think that the crisis in Asia has probably chopped off about 300 - 400 tonnes or close to 10% annually from last year's demand level and I would say 400 - 500 tonnes or 8% versus the type of demand levels that we would have had otherwise this year. Part of this reduction in demand in a transitory thing. A surprisingly large amount of the decline in demand in the Southeast Asian countries was due to dishoarding in Thailand. We believe that dishoarding in Thailand has now abated. There may be a new shock of a similar sort coming out of Korea because the Korean economy and currency is under a lot of pressure now. But these bouts of dishoarding tend to be quite transitory. We expect that, once they run their course, the more sustainable decline in demand will result from the depreciation of these currencies; there devaluations raise the gold price in these currencies which rations down price elastic demands. This more sustainable decline will be more in the order of about 200 to 300 tonnes. So, we're talking about a market that's in a deficit of somewhere between 1500-1800 tonnes for 1997 overall. God knows below $300 gold it's more than that, maybe 2000+ tonnes at an annual rate. The Asian currency crisis, with these currencies at these depressed levels, probably would chop a couple hundred tonnes off of demand on a sustainable basis. This demand decline has been an important factor in this year's gold bear market but it's not the overwhelming factor. What's really caused this bear market is central bank gold flows, not threats of central bank selling, not Swiss selling in 2001, not the Asian currency crisis, but central bank selling and borrowed gold flows that are occurring right now, that are occurring this year.

Now, the other question that was asked was "What will happen to the dollar and what is its impact on gold demand?". Well, this year we have a huge rise in the dollar against a gold demand weighted basket of currencies. What's important is not the dollar exchange rate against, let us say, the British exchange rate, because when the dollar exchange rate changes against the British Pound and influences the Pound price of gold, it doesn't effect global gold demand very much because the Brits don't buy very much gold. What's really important is the movement of the dollar against those countries that consume the most gold. That would be Southeast Asia and India.

This year we've had a tremendous rise in the dollar in the 2nd half of the year against an index of currencies weighted by gold demand - that is, in effect, one that's weighted heavily by the Far East Asian countries. My own belief is that the current break in the Southeast Asian currencies has gone much too far. Take the Korean Won. The Korean Won was 8000 in 1996, it was 9000 by the middle of this year. The current account deficit of Korea had already swung from a 4% of GDP deficit last year to a balance by November and now we've taken the Korean Won all the way down to 14,500. This degree of depreciation of these Asian currencies far overshoots anything that's needed to get their current account and balance of payment houses in order. In fact, Far East Asia overall is a current account surplus block against the United States. China, for example, has a 5.5 billion dollar monthly per trade surplus with the United States. The currencies of this whole Asian block over the long run are not going to be depreciated against the U.S. dollar. In my own view, if you look at the dollar against these key Asian currencies, this dollar rise looks like as much of a dollar disequilibrium as the 1984/1985 rise, and one that has the potential for an equivalent kind of reversal. In that period, as a result of the big rise in the dollar, the current account deficit of the United States went to about 3% of GDP. Prior to the rally in the dollar this year this deficit was already at 2% of GDP. With the long lags in trade, we can expect the current account deficit of the United States as a percent of GDP to go to an all time record. Back in 1985/86 we were still a net creditor nation. Now we have a net debt equal to 12% of GDP. If you look at the United States from a balance of payments point of view, its net debt position, its current account deficit, where its current account deficit is going to go, it looks like an incredibly vulnerable currency. So, although I think we're going to chop a couple of hundred tonnes off of demand at an annual rate now from the soaring dollar against the Far East Asian currencies, this will be more than reversed in the years to come. OK, that's it. Thank you.

BC:     Frank, first of all, I'd like to say thanks very much for that somewhat detailed overview on gold markets and gold flows. I would actually lead off with the first question. By the way, I'm Brad Cooke, President of Canarc, and after I'm done anybody else who had questions please feel free to state your name and question for Frank Veneroso.


BC:     Frank, on the one hand, I'm reading in various newspapers and magazines today that the U.S. economy is so strong that ultimately the markets, not only the American markets, but markets abroad, will be driven by this huge engine of growth in the United States. That's one predominant opinion expressed in the media today. The other view is that the U.S. dollar is on a bubble, like you just pointed out, that the deflation of other currencies is overdone and that ultimately the U.S. dollar is in trouble, or could be in trouble next year. How does the market reconcile those two very different positions?

FV:     Look, the market doesn't think. I'm very serious about this. A mere year ago, the market was throwing money at Southeast Asia, there was a growth miracle, there was nothing wrong. Today, the markets have depreciated the Southeast Asian stock markets to an extraordinary degree. It is very very hard for me to justify either extreme. I was an advisor to emerging country governments from 1971 to 1989 and I have some sort of historical perspective on what's an extreme in this business. What I'm seeing in Southeast Asia and the Southeast Asian currencies now is beyond anything I could have imagined. If you take a look at Southeast Asia, it is a current account surplus block. China has a huge current account surplus, Taiwan has a huge current account surplus. Some of these countries that are supposed to be problem countries like Korea have only had a current account deficit of 4% of GDP at the peak. So I don't think the markets really think about these things. I think that markets these days go to bigger extremes than they did in the past.

About U.S. economic strength, it's very true that the U.S. is a very strong economy. We have a strong economy when most of our trading partners have had weak economies. This has resulted in high interest rates in the United States because we're at a late stage of an expansion against very low interest rates abroad because they're very close to recession or at least they have high levels of unutilized resources. This large interest rate differential is drawing capital flows into the United States and strengthening the dollar. But if you take a long term view you're not going to have this degree of cyclical asynchrony in the world economy in the future. You're not going to have the U.S. economy at the end of a boom all the time while Europe and Japan have tremendous amounts of slack and there is recession in a lot of the emerging world. I can assure you that, if you go out 5 years from now, we're going to find that the tables are turned. When the tables are turned we'll have lower interest rates, not higher interest rates, in the U.S. And these interest rate differentials will turn capital flows the other way and unseat the dollar. I think what's really key here is that this is a very unique cyclical asynchrony that cannot persist; it's currently supporting the dollar but it will not support the dollar in the future.

BC:     OK. Thanks for that Frank. Does anybody else have a question for Frank Veneroso on gold?

John Hugate, Chairman of Misty Gold:    

I've got a question. I'd like to hear your thoughts Frank on how oversold you believe gold is.

FV:    I don't think about the gold market as being oversold. I know this sounds silly, but it's not a normal market, it's not a market where you've got a lot of longs that are bailing out. The demand side of this market is jewelry demand and bar hoarding demand by small people all over the world. They buy larger amounts on a scale down. They tend to spend a certain fixed amount of their income on gold. When gold becomes cheaper on a per ounce basis, their income buys more ounces. What drives this market is supply. It's not mine supply because mine supply is really quite static in the short run. It's actually quite static in the long run as well. Mine supply grows at a very slow rate under virtually all conditions. What drives this market is the flow of central bank gold. This flow of central bank gold is the sum of central bank sales and borrowed gold flows from various sources. As these flows intensify, they drive the price down so that the income of all these little people all across the world can absorb the larger number of ounces that the central banks are selling. It's a market that is driven by supply. The way to really think about the market is, "When will the supply that's driving it down abate?". Now, it's my view that we now have an extreme unsustainably intense flow and that it will abate. And so, the term "oversold" seems less relevant to me in a market that has this kind of a market clearing mechanism.

John:     As a follow on that Frank - What condition would have to persist or be created to cause central banks to buy as opposed to sell?

FV:     Well, in this book we're coming out with, I do a lot of historical studies to show that, over the long run, gold's appreciation in real terms exceeds the real interest return on government bills. If you take a long enough historical perspective, it's not hard to see that. Most people think the gold price went up a lot after 1971 because it was held down by central banks. In fact, if you look at the record it was actually supported by central banks in 1971. So the whole increase in the gold price from 1971 to 1996 was a free market rise in the price. Well, the real return to gold over that period was 5%. Treasury bills have never yielded anything like 5% in real terms for so long a time. Now, I believe that at some point in the future gold's long run real return will become manifest. The real rationale for most central bankers for selling gold today is that it doesn't have a return. The real rationale for a lot of people who are going short is that it's a very low cost borrowing. In fact neither is true over the long run. These central banks and short sellers are looking at the last 5 or 10 years of a bear market that is a recoil from a huge bull market that occurred in the 1970's. They basically have backward looking expectations. They think that the last 5 or 10 years is what the future will be like. Eventually, market participants will come to realize that gold's commodity dynamics generate a positive real return. And when that happens, I think that some central banks will be more inclined not to sell and other central banks will be more inclined to buy.

Bruce Paid??, Morgan Stanley:     Frank can you quantify, or at least touch on, the role of the options' activity in the gold market and is there any way of getting some kind of a handle as to what this action for position may actually be in the market?

FV:     Are you on the gold trading desk?

Bruce: No, I'm not. I just manage private money.

FV:     OK, well look, go to your gold trading desk and ask them about this. Once again, we've discussed this in this book. There are 100,000 put options on Comex and 350,000 call options on Comex. What does that tell us? Comex is the tip of the iceberg. The OTC market in gold is 10 times the Comex. We've taken a look at this and we've said, OK, there's a great deal of double counting in all of this. A lot of option exposure is hedged from one dealer to another or on to the Comex and then from the Comex back to the OTC market. What percentage of this grossed up market is the true net position of this market? We did a bunch of calculations and we concluded that the total net face value of these options is about 4,000 tonnes and the delta on these options is probably about 1,000 to 1,800 tonnes. Part of this option position is producer in origin, most of it is central bank in origin. This delta probably accounts for 1,000 to 1,800 tonnes of total gold borrowings which we estimate at about 8,000 tonnes. This option structure provides a certain amount of resistance to the gold price when the gold price rises, but for certain technical reasons, this resistance is only transitory. Basically what happens is that those options are short dated. They soon get re-written. When they get re-written to a higher strike price, this selling pressure that emerges on any rally abates. Options complicate the dynamics of the gold market but they don't really change it. If you talk to your dealers about it, they might agree about this. I've talked to some dealers and they think my estimate of the delta on the total option book of the market of about 1,000/1,800 tonnes is not out of the ballpark. They see their own books. They estimate what percentage of the overall market they are. Then they project from that and come up with a number that's of that magnitude.

BC:     So Frank, this is Brad Cooke again. At the outset here today you said that you estimated about half of the difference between gold demand and gold supply is filled by either central bank sales or central bank lending. You also, in your research this year, talked about the slingshot effect on the downside when the shorts get hold of gold and of course on the upside when they cover. You haven't talked about short covering here today. Do you want to say something about that?

FV:     Yes. I wrote a piece after we broke in July (I guess it was around August). Basically I thought that the big break that occurred then was due to fund short selling and I'm sure fund short selling was a big contributor to it. The market was supported by physical demand and I believe by some Asian central bank buying. The market then built a base and rallied up to 330. At that particular point in time we had a giant short position in the market. At any other time in history, once you broke above 330 you would've exploded. We broke above 330, we had a huge amount of short covering, literally 500, 700, 800 tonnes in a very short period of time and the market was absolutely contained by central bank selling. The big central bank selling that's probably been the problem late this year hasn't occurred here, but occurred on that rally. What that did was to provide a huge amount of gold to the market that let the shorts out. Then the shorts were free to go short again once the price went down. Once that rally above 330 failed and we started down again, the funds started to go to the short side again. But the market was already saturated with all the central bank gold that was thrown into the teeth of that short selling rally. Now, I'll also say that the central bank selling has persisted, and persisted in a very uncharacteristically savage way. I mean, these guys have been beating up the dealers. This is very unusual. Central banks normally have operated through the BIS. Then selling was done with a great deal of discretion, it was done very cooperatively with dealers. We're hearing stories about dealers taking losses, getting set up by central banks, saying this is how much we're going to sell, there's no more behind it. All of a sudden all the other gold dealers get hit with a couple hundred thousand ounces and the dealer gets bagged. I must say, it's very very uncharacteristic. But, at some point, this large short position will unravel. Whether or not you get the sling shot effect, whether you get a powerful rally or not, will depend upon whether or not there's a very very large volume of central bank selling or producer selling or both into the teeth of the short covering rally. My guess is that, when these big central banks are done, yes, there'll be central banks that will sell into the teeth of that rally, but the quantities will be less. And then the short covering rally that materializes will be substantial.

BC:     Another question for Frank?

Judy Lipton:     Yes. I've heard some rumours that between '61, and let's say Nixon, that U.S. may have ended up losing a lot of their gold supplies. Is there any real way of quantitating what the fed has and if they don't have what we think is there some way for it to be known so that it may effect the market's reactions?

FV:     I have no opinion on this. I've heard this talk and there are other analysts that have opinions about it. I really don't. I assume that the U.S. has the gold it says that it has and I wouldn't know how to figure out otherwise.

Judy:     OK thank you.

Ramon???? Manager of ??? Gold Mines:     Yes, I have a question please. Mr. Veneroso, there is another central bank outside the European union which is of the Swiss central bank which we found being pressured from the coming of the European Central Bank and now huge selling of gold. Actually you didn't explain the ??? because they didn't have to announce it really last year and they made a big move.

FV:     You want me to comment on the planned Swiss sale?

Ramon:     Yes.

FV:     OK. First of all, as you know, you need a change in the constitution through a referendum in order to sell the gold in the Swiss central bank. This is not going to be an easy referendum to win. It's not going to be easy because the current polls show about an even split between those who oppose and those who are for this gold sale. But, in order to be able to get the referendum to pass, you need not only a popular majority, a majority among all the voters, but you need a Cantonal majority. The Cantons have very skewed population makeups. The more liberal type of people that are more inclined to vote for the referendum, that is for gold sales, are concentrated in the cities, therefore, in the urban Cantons. Those who are more likely to be opposed, the more conservative, are in the rural Cantons and there are far more rural Cantons than there are urban Cantons. So, if you have an even split in the polls for the popular vote on the referendum you will probably lose the Cantonal vote. The Swiss authorities know they have an uphill battle. They have therefore given themselves a lot of time to prepare their campaign to win. Now, they're going to have a lot of opposition. Christoff Blocher, who is the head of the opposition party, has decided to campaign against the referendum and Blocher has tended to win in most of these referendums. The Swiss National Bank and the Government have given themselves a lot of time to produce the propaganda to create the change in thinking and sentiment in Switzerland needed for the referendum to pass. That's why they've announced it early, that's why they had a special panel appointed to make an independent recommendation and the like. There will not be any Swiss sales until probably the year 2000 if the referendum passes. The referendum doesn't occur until sometime well into 1999. My own belief is that the referendum is not going to pass. If we have a split in the popular majority we're going to lose the Cantonal vote and if they lose the Cantonal vote there'll be no gold sales. Some of the officials in the Swiss National Bank have privately told some of my friends who know them well, that the referendum will not pass. It is not the Swiss issue that is weighing on the gold market, it's physical gold sales by central banks today and physical gold borrowings from central banks today.

Ramon:    Yes, but I mean the Swiss Central Bank didn't make this move with the aim of losing the referendum but with the aim to win it of course and I would like just to have an explanation of why they did such a thing because they really changed their politics.

FV:     Look, it is my view that there are a lot of bureaucrats in central banks today who don't believe in gold. They believe it is an asset inherited from another era, it is barren, it does not bear interest; therefore it should be sold and put into some kind of an interest bearing security. I think that the Swiss National Bank officials are of this line of thinking. They seized on the holocaust fund as an opportunity to get the constitution changed, which would allow for this diversification out of gold into government securities. I also feel that they may have made a miscalculation, they did not think they would be confronted with as much opposition as they're facing.

Unknown person:     Frank I have a question that hasn't been answered as to how it would effect gold, and this in retrospect to Japan because we're not going into a 10 minute desecration. To me, Japan's entire financial system is built around a value with company shares and that foundation is in the process of crumbling. If the Japanese market does tend to crumble, they have a U.S. 1929 stock market disaster, how would that effect go? Japan is a strong nation, we're not talking about Korea now, we're not talking about the Netherlands or Belgium, we're talking about a very strong country.

FV:     Quickly, there is going to be a move before that happens to monetize the debt in the banks, to take the huge bad debts off the backs of the banks. In effect there's going to be more extreme reflationary measures than have already occurred. That might be somewhat negative for gold if it weakens the currency and thereby drives the yen price of gold up which will ration down demand. On the other hand, in the past, because the Japanese have a long tradition of hoarding gold, events like this have stimulated gold investing. In 1995, when there was a run on the banks, there was a big surge in bar hoarding in Japan. It has since abated. There are signs that it's recurring now. Japan will get negative real interest rates; in the long run that should stimulate bar hoarding in Japan.

RC:     Ladies and gentlemen, we have approximately 5 minutes left and I have a call from Switzerland. Oswaldo Carciente please go ahead.

Oswaldo Carciente:     Thank you. Frank, I have two questions. The first question is what is the credit risk involved in all this central bank borrowing. They have been lending all this gold, the question is how can they be guaranteed of getting the gold back? 2nd question is, you've talked very well about this market had been oversupplied and that has been the major problem and as you very well know, gold markets and ??? only happen with major investment demand and basically that's the swing factor which will eventually make things look completely different because right now what you are looking at is investment. What do you think about the prospect of investment demand?

FV:     Well first of all, I don't think that you need investment demand to have a rally in the gold price. I think all you need is to have an end to official disinvestment and gold borrowing. I won't disagree with you that, in the 1970's, investment demand caused the bull market, that's true, but I think right now the model of the gold market that's appropriate is much more a commodity flow supply/flow demand model. If you reduce the supply, the price will go up. I don't want to speculate right now on investment demand. I think we're too far removed from that. Yes, there will be investment demand at some point in the future. I can see a lot of things happening on the world macro scene that could create investment demand. But that's a very complex issue, so I'm loathe to really comment on it. This market will turn up because you will get an abatement of the central bank flow and an unwinding of the speculative short positions which are the real investment or speculative positions in the market today.

BC:     So Frank, I think at this juncture I'd like to rap up. I want to thank you first of all for giving us the pleasure of your views today. There's many many questions that were not asked of you that I think you some very interesting views on. Canarc's proposing to do a transcript of today's call and if anybody would like a transcript, please contact Robert Carriere at our office over the next day or two. Frank as you know does proprietary research into global market, specializing in gold flows. He didn't throw out numbers for instance on how low gold was going to go this month or how high it's going to go next month but I think his contacts and knowledge in the bullion market can give you clear indications of the direction gold is going. I have a number of questions with regard to the Asian crisis and I think the U.S. dollar is in fact going to be somewhat weaker next year, but I think we'll save those questions for another time. So Frank, I want to thank you very much and if anybody who's listening in wants to receive your research or in fact the gold book that you have out in January they are also welcome to contact Robert Carriere here at Canarc. So that's it for now, thank you very much.

For further information, contact:

Robert Carriere

Manager of Investor Relations

Tel: (604) 685-9700


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