Interview with Jessica Cross: CEO, VM Group

The VM Group’s Yellow Book is a bi-annual analysis of the global fundamentals and outlook for the gold market.

MONEYWEB: Jessica Cross joins us now from London. She's the CEO of the VM Group. Jessica, maybe you an explain exactly why gold fell so much this afternoon?

JESSICA CROSS: Well, I think it's short-term movements; we must expect this sort of thing. We talk about our Yellow Book, we talk about the roller-coaster. So we are talking ups and downs. We've had a meteoric rise over the second half of this year, and the market was very, very long, and one would expect some profit-taking and then re-establishment at lower price levels for it to come up. But if I think on average, looking to 2008, the fundamentals of gold are looking very strong, and are supportive of a higher price. So corrections along the way - well, yes, to be expected. But I think the sort of upward trend is still very much intact.

MONEYWEB: Is the volatility going to continue, though, in 2008?

JESSICA CROSS: Oh, absolutely, I think we are going to see volatility in all the commodities. We are looking at what might be happening to the US economy, what might happen to the dollar. We are not expecting the dollar to recover or strengthen in the next year - maybe 2009. We are looking to certainly slower growth in the US, and the Fed reducing interest rates further to try and stave off the effects of a recession. That's a kind of double-whammy for gold, because you're going to get higher gold prices, certainly in dollar terms. So we are looking to all this kind of thing, together with the supply/demand balance, which is looking in good equilibrium and with only a very minor surplus, which is easily accounted for by what is apparently just non-stoppable investment demand.

MONEYWEB: Jessica, if we look at the correlations between the dollar and gold, is it still as close as it used to be, or has it decoupled slightly?

JESSICA CROSS: Well, it seems to decouple and re-establish. I mean, all these correlations go through periods of where they are quite strong, and other times they are not. People used to watch the oil price and the gold price very closely, the silver/gold price ratios, all these kind of things that people watch. But certainly the price is responding to dollar weakness, there is no doubt about that.

MONEYWEB: You talk in the Yellow Book about the lack of recycling that was surprising in this half. Why was that, and what exactly are we talking about here?

JESSICA CROSS: When we looked to a very, very sharp price surge as we've had, what normally happens is there is a kind of a flow of recycled gold which is very price-sensitive, back to the refineries fairly quickly, because it's very elastic and it responds to the price movement. And it can happen in very, very large volumes. We suspect that this happened all the way from $650, say $650 upwards. So by the time we hit $800 and up, there was no more recycling to come out. Essentially it had been done, it had all come back to market, and we talk about Old Mother Hubbard's cupboard. It was empty.

MONEYWEB: Where is that recycling coming from, or where is that gold that is recycled? Where does that come from?

JESSICA CROSS: It can come in a number of forms. It can come in bars, in can come out of the Indian subcontinent, it can come out of the Middle East. All these areas. And people tend to go and clear out their drawers when the price of metals goes up like this. There are people at the moment complaining that autocatalysts have been cut out of their exhausts overnight, because people are trying to recycle the PGMs. So when you've got really, really strong prices in precious metals, things begin to happen on the recycling. But we've just not seen it in the last two to three months, and the refiners are saying they are getting metal back, but nothing in the volumes that they would have expected at these prices. And that must remain very, very supportive of the price on the lower trading range.

MONEYWEB: If we look at the fundamentals, the demand/supply side of things, you are forecasting a further surplus in 2008, but it is lower than what we have seen in 2007. Are we likely to see that trend downward continuing in terms of the supply and demand fundamentals?

JESSICA CROSS: I think so. You know, the surplus is relatively small. We've pencilled in 123 tons, and that represents what we know we cannot measure, or inferred investment, whatever that is, because there are a lot of aspects of the gold market that you can't measure very accurately. But what we are saying there is that that surplus or that residual that we've identified is small, relative to what's in ETFs, for example, and what we expect is going to go into ETFs. And we are forecasting that by the end of next year, this time next year, we are going to have over 1000 tons of gold in ETFs. That is a very, very successful product. There are now over a dozen different ETFs around the world, four alone in India. And there are certainly attracting investment interest into the metal.

MONEYWEB: Is there going to be, or are we going to reach a stage where the level of investment into ETFs levels out somewhat, and it becomes less of a factor in where the price is going to?

JESSICA CROSS: I thought eventually that must happen. But I think, you know, it is such a convenient way of getting into the market, and the units are small, so everyone can afford to have a punt in gold without having to buy gold equities or futures. I think it's a got a long way to go before we see that kind of market saturation. They're talking about a possible launch in Japan and other countries in 2008. So there clearly is continued and new interest in these products.

MONEYWEB: What loses out when people invest in ETFs?

JESSICA CROSS: Well, it's interesting. We were asking the question, could the gold equities be losing out? And we need to really look closely at who is holding the ETFs - are they original gold stockholders, who have deserted the stocks and gone into metal, or is in this in fact new money. And you will probably find it's a combination of both.

MONEYWEB: In the Yellow Book, you talk about surprise if gold doesn't reach $900 within 2008. What would need to happen for that not to happen?

JESSICA CROSS: For that not to happen, I reckon you would have to have your longs seriously bailing out. Now what could make them do that? I don't know - strength in the dollar, complete resurgence in the equity markets, really, really strong equity markets, interest rates reversing again instead of coming down, people saying, oh gosh, we don't need to worry about inflation at all. That kind of scenario where they think, oh well, we just need to hold gold any more. But everything we see coming out of the economic powerhouses like the US and China, is suggesting that economic slowdown is coming, weaker US currency, lower interest rates. And that just tends to follow through into, well, we must expect higher dollar gold prices.

MONEYWEB: And if we then look at where it's likely to get to in 2008, have you got a view?

JESSICA CROSS: Well, we stuck our necks out and we said, yes, OK, we are going to see $900, we've got to see $900 next year. But we're looking for an average of $850. That's what we've pencilled in. So then there is some downside. But it's going to remain to be seen where the lower trading range settles. We haven't yet had a major shorting of these long positions, and we need to see where the physical demand is going to come back very, very strongly. And I suspect at the moment, it's probably at the sort of $770, $780 level. But that needs to be tested before we know we're right on that.

MONEYWEB: And any kind of New Year's resolutions - what you would like to see happening in the gold sector over 2008?

JESSICA CROSS: Our New Year's resolutions? Well, I would like to just see more excitement. We've had a tremendous year, it's been incredibly interesting. And from a research house point of view, we would just love to have more of what we had during 2007.

MONEYWEB: Jessica Cross is the CEO of the VM Group. Wayne, clearly, they're bullish on gold?

WAYNE McCURRIE: Look, they certainly are. If you take the classic drivers of gold - this is now going to back to the classics - the one is high inflation. We haven't seen any inflation whatsoever, and yet the gold price has gone from $250 to $800. So it's clearly not inflation worries that are concerning people. In fact, inflation has been relatively OK for a while. It certainly hasn't got to 6, 8, 9% in the US, and currently is nowhere even close to that. So inflation didn't drive the gold price up. What did? A lot of it is the weak dollar, but it's not the total explanation - maybe half of it. Because if you look at the euro gold price, that's still increased quite significantly. So at least the price of gold has gone up by more than the dollar has weakened. So why has it gone up? I don't know if anyone's got a specific answer as to why it's gone up. We've had a huge commodity cycle, but you can say the same story for oil. And $90 or $100 oil was physically unbelievable a couple of years ago - it was just so far out of the realms of possibility, and yet it's there. And there hasn't been a total disruption of supply of oil; in fact more oil is pumped today than what we use. So it's not as if it was like a 1973 scenario, where there was a physical contraction in the supply. Yet the price went up. What is it? Maybe it's the Chinese buying. so far out of the realms of possibility, and yet it's there. And there hasn't been a total disruption of supply of oil; in fact more oil is pumped today than what we use. So it's not as if it was like a 1973 scenario, where there was a physical contraction in the supply. Yet the price went up. What is it? Maybe it's the Chinese buying.

ABOUT THE INTERVIEWER Geoff Candy Email: geoff@moneyweb.co.za