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13 April 2012 23:13

Gold on track to fulfil its multiple roles? Paul Walker - global head, precious metals, GFMS

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Alec Hogg is a writer and broadcaster. He founded Moneyweb

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    ‘Hedge into strength, not into weakness... a sensible strategy for any business.’


    ALEC HOGG: Paul Walker, the global head of precious metals at GFMS – Paul, you know this country, you come from this country. You would be what many people would think is a “confused somebody”, because on the one hand you are being quoted all over the South African media, saying the gold price could go through $2 000. But on the other hand you are advising – or so the media tells us – that the miners should start hedging again because it could go below $1 000/oz. Now, it's a lot like you are having your cake and eating it, Paul. Not like you.

    PAUL WALKER: Well, you know, the interesting thing about it, Alec, is I was just making an observation that there needs to be a more rational debate about whether or not companies should hedge. And if you have a look at where the gold price could end up over the next say, three or four years, it strikes me as an obvious debate to have. And what really does kind of really irritate me a little bit is this kind of almost ideological gut reaction that somehow hedging is a bad thing, and we shouldn’t even discuss it. It's like having a one-horse race. You need to entertain the fact that there are times when hedging might work for you.
        And clearly there are times when hedging won't work for you, in the same way that any decision in business may work against or for you at particular times. And where we are in the market at the moment, and where we think it's going to go in the next six to 12 months, all I was making is the point that maybe it's time to have a rational, confident debate about whether or not there is a time when you may want to do a small bit of hedging; you may want to look at the optionalities out there. There’s a whole raft of options available to people, but their kind of blanket rejection is to me somewhat irrational.
       I'm just going to make one more point – the thing that really sticks in my throat is the idea that shareholders are universally averse to the idea that the company in which they hold shares – that there should be no hedging in that company. I just don’t buy that. I don’t think there’s ever been a really confident debate post the debacle of the 1990s and the lack of unwinding at an early stage in the 200s.

    ALEC HOGG: Paul, that’s quite a lot different from the way you’ve been quoted here in South Africa – that you say the gold price could go below $1 000/oz

    PAUL WALKER: It could.

    ALEC HOGG: It could go to $20/oz.

    PAUL WALKER: The thing is, it could go well below $1 000/oz. There are very manifest reasons to believe that at some juncture in the not-too-distant future, gold could go below $1 000. And I’ll say it to anybody who is willing to challenge me on the basic thesis and show me where I am wrong in this thesis. All I'm saying is when the interest-rate cycle starts to change, and it will change at some time – probably not this year, may not even be the following year, but at some juncture I the future – the issue for a miner is  not the same as somebody buying ETF gold where you buy today and gold goes to $1 900. And, quite frankly, if I were a short-term buyer of gold I would buy gold at $1 670 or wherever it's trading at today – buy it and then cash your profit in two months or three months’ time. But when you are a miner and you’ve got a portfolio of mines that extend out 15 or 20 years, you have a duty of care to your shareholders, to your stakeholders – and the stakeholders are not just your employees, but the people who support your industry and there's in a sense a governmental dimension to this issue – I would just say, have a look at what you may need to do to protect yourselves if gold prices were to go below $1 000. And to anybody who can seriously argue the case that it's impossible for gold to go below $1 000 I would say firstly I disagree with you.
        Secondly there is a material probability – and I can outline the reasons for it – you should be looking at some way of protecting yourself if that were to happen.

    ALEC HOGG: I think you’ve clarified it for us, Paul. I was a little worried because you’ve been pretty bullish on gold of a while.

    PAUL WALKER: I'm still bullish, Alec. Again, let me be very, very clear to your listeners – and consistently I've been repeating this on your show for years – I'm just highlighting the fact that there’s a material probability of downside risk. In the short term and the medium term there’s a lot of upside. And what I am saying to the producers here in South Africa and elsewhere is – at least entertain the prospects of looking at what pricing you can get when the pricing is right. Hedge into strength, not into weakness. And to me that is a sensible strategy for any business.

    ALEC HOGG: You don’t sound like a confused somebody at all.

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