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. 

 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 their objectives. 

  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 clearly over. 

  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 right. 

  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 market. 

  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.