Metals Report Giscard d’Estaing may help gold

Remember Valery Giscard d’Estaing?

You’re not alone if the name only vaguely conjures up images of an aloof, patrician French politician from an age long past, an age when Bjorn Borg ruled the tennis world and the MG sportscar went out of production.

As president of France from 1974 to 1981, Giscard d’Estaing moved his country strongly to the right with increased military spending and strong law-and-order policies during a time that saw oil prices, inflation and unemployment skyrocket.

But, regardless of their political persuasion, by the end of 1987 gold bugs may be looking back with fondness on ol’ Val and remembering him more clearly for an entirely different reason than his term as president. A gold-backed bond issued by France while he was finance minister — nicknamed, in fact, the Giscard Bond — could have a big impact on gold prices over the next 12 months.

Officially known as the Emprunt 7% 1973, the bond was issued in 1973 and is redeemable in French francs in January, 1988, at an amount indexed to the price of gold. In Europe, the freely-traded Giscard is estimated to be a substantial portion of several million- dollar funds. It’s seen as a wa y of playing gold while earning interest at a rate of 7%.

In fact, some funds have gone short on physical gold at a net annual cost of 2%-5% while going long on the Giscard and earning interest at 7%. They sell gold they don’t have (go short) and buy the Giscard bond with the proceeds. If gold prices go up and they have to cover their short position, the value of the bond will likewise have gone up because it is pegged to the price of gold. If gold prices go down, they’re still collecting 7% on the bond.

The question is, what will happen when the bond comes due?

For example, those short positions on gold will have to be covered — a bullish scenario for gold prices.

A more important question, however, is what will the French government do?

The 6.5 million bonds outstanding currently represent more than $9 billion(US) or about 7% of France’s outstanding government debt. Such a large amount suggests that the government will try to roll over at least part of the bond into a new debt instrument.

However, Pierre Lassonde, who manages the BGR Precious Metals fund, thinks otherwise. He speculates that France, currently enjoying a substantial trade surplus, may opt to pay off at least a large portion of the Giscard debt.

If so, the result would be a lot of fund managers with a lot of cash, cash that is committed to gold investments. Funds have looked askance at South Africa lately, a trend that is likely to continue considering the political climate in the republic, so that cash is likely to be spent on physical gold or stocks of North American and Australian gold producers.

In other words, as the bond nears maturity, a lot of short positions in physical gold now offset by the bond will have to be covered. Then, when the bond’s redemption date arrives a year hence, the government will pay off a large portion of the bond leaving fund managers awash in cash which will then be directed back into the world’s gold markets.

Gold prices in 1986 were bolstered by the mysterious Sultan of Brunei, who is reported to have made large volume purchases at the beginning of the year, and by Japanese buying to mint the Hirohito commemorative gold coin.

1987 may well prove to be the year that Valery Giscard d’Estaing makes gold, once again, the creme de la creme of investments.