FSR Forum June 2011

13th Volume Juni 2011 issue #4

Commodities Interview Willem Middelkoop

Female Business Tour

Column Dr. R. Huisman

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Dutch TV personality

It might be a man’s world

Should we fear investors in commodity markets?

Een fusie begeleiden met jouw cijfermatig inzicht?

Financieel talent Sta jij aan het begin van een carrière als accountant of fiscalist? Dan is het goed om jezelf af te vragen waar jouw financieel inzicht het best tot zijn recht komt. Bij Baker Tilly Berk controleer je niet alleen het verleden, maar adviseer je ook over de toekomst van een bedrijf. Baker Tilly Berk combineert een landelijke aanwezigheid en een internationaal netwerk met kleinschalige kantoren dichtbij onze klanten. Die jij al snel persoonlijk kunt adviseren. Je werkt bijvoorbeeld mee aan de fusie van twee bedrijven, de internationale groei van een onderneming of een audit in de publieke sector.

Om ondernemers te helpen groeien zoeken we medewerkers die zelf ook ondernemend zijn en zich continu willen ontwikkelen. Denk jij dat de rol van adviseur bij jou past? Dan hebben we voor jou ook een goed advies: werkenbijbakertillyberk.nl.

www.werkenbijbakertillyberk.nl

ACCOUNTANTS EN BELASTINGADVISEURS

fsrforum • volume 13 • issue #4

Commodities

Preface

Dear reader, The theme of this FSR Forum edition is linked to a very interesting theme in today’s financial world: we will go into commodities. In the dynamic financial world there are many analysts who are wondering if stocks and bonds are the best way to manage your assets. Within that discussion, many subjects are considered. Asset managers around the world are talking about long-term bonds, hard assets like real estate and even stash your money at the local bank to leave it there just to watch if the interest will be above the raising inflation. Another subject many wealth managers and analysts are talking about is the great outflow into commodities. In this issue of the FSR Forum we are going to look at the opportunities of investments into hard assets like silver, platinum and last but not least, the most shiny and well-known hard asset, gold.

As said, this issue's theme is about commodities, in the broadest way of its meaning. In this issue we will look at three scientific articles about commodities, have an interview with tv-personality Willem Middelkoop and furthermore have the content you would expect in the FSR Forum.

In the first article Shaun K. Roache and Marco Rossi are wondering if gold is just a regular commodity or if it has something special that attracts asset managers. They want to create insight in the macroeconomic factors that make the price of gold fluctuate. At this moment, the writers declare that gold can be a ‘safe-haven’ because it will keep its underlying fundamental price. Due to these facts, the price reacts on news of macroeconomic levels. Shaun K. Roache and Marco Rossi use their paper to give insight in the way gold can be used to predict trends for long-term investors. Another thing they investigate is if gold is different compared to other commodities. Gold has a special role in the international financial system which causes a different behavior than other commodities.

The second article is written by dr. Nasser Saidi and dr. Fabio Scacciavillani. The article examines whether gold can assume a new function in the global financial markets after the big impact of the credit crunch of 2008. The writers are looking into two major points that will shape their article. The first subject is the role of gold as a hedge against specific risks as, for example, inflation.

The second topic is the role of gold as an international reserve asset, which can be used as an underlying asset for international transactions. First, dr. Nasser Saidi and dr. Fabio Scacciavillani will explain the risk of inflationary pressure hanging above the world’s financial system due to the unprecedented level of public debt which is created in a short time. In relation to that, they will examine the role of the US dollar as leading currency in an unpredictable financial system.

The last article in this commodity issue of the FSR Forum is from John Baffes and Tassos Haniotis.

They write about the upcoming commodity price boom in the near future. In the period between 2006 and 2008 we experienced one of the longest and broadest commodity price boom after World War II, where the price of crude oil peaked at 133 US Dollar per barrel. John Baffes and Tassos Haniotis try to describe the chance of a repeat of such a price boom at short notice.

To put it in perspective, they first describe the key characteristics of long-term commodity price movements. Afterwards they investigate the growing emerging economies and their influence on the commodity price.

2 • Preface

In this issue of the FSR Forum you can also find an interview with Willem Middelkoop. Mr. Middelkoop is a well-known Dutch journalist who is specialized in the commodity markets and the silver and gold markets in particular. He frequently occurs in talkshows on television like RTL-Z and Pauw and Witteman. In the interview of Mr. Middelkoop with the FSR, he talked about the outflow of soft assets into hard assets like gold. He gives his vision on the financial system and how it will be in the near future. Mr. Middelkoop, who also frequently occurs at student seminars, also shares his view about opportunities in the labor market for recently graduated students.

Looking back on the fourth FSR Forum, I hope this issue will give you a good insight into the current commodity markets. It may also give you some hints for your private investments, or change your personal view about the outflow to hard assets and the fear of some analyst to stay in soft assets. A market that, according to some analysts, is a market that is based on a currency called the US Dollar, which has no underlying asset as told at the Bretton Woods Conference in 1944 and isn’t, like United States President Richard Nixon in 1971 declared, as good as gold anymore.

I hope you will enjoy reading this edition of the FSR Forum and it will sharpen up your opinion about the commodity markets.

Sincerely, Kim de Vries Editor in chief FSR Forum FSR board 2010-2011

× Preface • 3

fsrforum • volume 13 • issue #4

Commodities

Table of contents

The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?

Shaun K. Roache and Marco Rossi

Commodity prices have not been immune to the recent protracted period of financial turmoil.

For some commodities, the pro-cyclical nature of demand has driven price moves, while for gold; the crisis has underscored its role as a safe-haven asset and store of value. Insights on how commodity and gold prices move and react to news, particularly in this context of higher volatility, can shed light on the macroeconomic factors that drive short-term price patterns.

This is useful for those trading in these markets on a frequent basis and also for long-term 6 market participants that take their decisions based on price fundamentals.

The Role of Gold in the New International Financial Architecture: Moving to a ‘Hard SDR’ Dr. Nasser Saidi and Dr, Fabio Scacciavillani

This paper examines whether gold can assume a new function in the global financial markets taking shape in the aftermath of the crisis. The argument revolves around two points: 1) the role of gold as a hedge against specific risks, such as inflation outbursts or financial contagion; 2) the role of gold as numéraire for international transactions and therefore as an international reserve asset. In relation to point 1) the paper stresses the danger of a fiscal overhang from the financial crisis and the inflationary pressure building up from unprecedented level of public debt in peace time.

13

Placing the 2006/08 Commodity Price Boom into Perspective John Baffes and Tassos Haniotis

The 2006-08 commodity boom was one of the longest and broadest of the post WWII period. The boom- and especially the 2008 rally, when crude oil prices peaked at US$ 133/barrel (up 94 percent from a year earlier) and rice prices doubled within just five months - has renewed interest in the long-term behavior and determinants of commodity prices, and raised questions about whether commodity prices have reversed the downward course that most of them followed during most of the past century. It has also produced numerous calls for coordinated policy actions at the national and international level to address food availability and food security concerns.

22

Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913

Editor in chief Kim de Vries

13th volume, number 4, circulation 1300 copies

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4 • Table of contents

Editorial department Rick Klootwijk Barnabé Lacroix Rishi Sripal

With the cooperation of Drs. J. G. Groeneveld RA RV Dr. R. Huisman W. Middelkoop S.K. Roache M. Rossi J. Baffes T. Haniotis Dr. N. Saidi Dr. F. Scacciavillani

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Table of contents • 5

fsrforum • volume 13 • issue #4

The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?

Shaun K. Roache and Marco Rossi July, 2009

6 • The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?

I. INTRODUCTION Commodity prices have not been immune to the recent protracted period of financial turmoil. For some commodities, the pro-cyclical nature of demand has driven price moves, while for gold; the crisis has underscored its role as a safehaven asset and store of value. Insights on how commodity and gold prices move and react to news, particularly in this context of higher volatility, can shed light on the macro­ economic factors that drive short-term price patterns. This is useful for those trading in these markets on a frequent basis and also for long-term market participants that take their decisions based on price fundamentals, which may be reflected in the release of macroeconomic information.

that a wide variety of economic announcements affect U.S. Treasury bond prices, with labor market, inflation, and durable goods orders data having the largest impact.

Commodities are not financial assets, but these results are relevant for our study given the relationship between commodity prices and some financial asset valuations. Frankel (2008) argues that interest rates can have a significant effect on commodity prices and Roache (2008) provides supporting empirical evidence. The strongest and most consistent relationship, however, is between the U.S. dollar and commodity prices, and there is a building consensus that macroeconomic news does affect exchange rates.

Using an event study methodology that has been used successfully for asset prices, this paper investigates which and how relevant macroeconomic announcements affect commodity prices. Our focus is on scheduled and periodic (rather than ad hoc) macroeconomic data releases. The fact that the timing of such announcements is known in advance makes the release of potentially price-sensitive information a poten-

Andersen et al (2002) explore the relationship between macroeconomic news and the U.S. dollar exchange rate against six major currencies. They confirm macroeconomic news generally has a statistically significant correlation with intra-day movements of the U.S. dollar, with “bad” news - for example, data indicating weaker-than-expected growth - having a larger impact than “good” news. Galati and Ho (2003) found similar results using daily data. Ehrmann and Fratzscher (2005) focused on the euro-dollar exchange rate and found that U.S.

Gold also appears sensitive to news related to supply and demand

news tended to have more of an effect on the exchange rate than German news. Activity indicators such as GDP and labor market data had a particularly large and significant effect, with the news impact increasing during times of high market uncertainty.

tially key factor that traders may wish to consider when effecting transactions. Reflecting its special role in the international financial system, we contrast the behavior of gold and we find that it behaves very differently to other commodities.

Gold prices react to specific scheduled announcements in the United States and the Euro area (such as indicators of activity or interest rate decisions) in a manner consistent with its traditional role as a safe-haven and store of value. In contrast, other commodity prices, where such news is significant, exhibit pro-cyclical sensitivities, albeit much less than financial assets.

The paper is organized as follows. Section II reviews the literature, the data, and presents the methodology. Section III reports and discusses the results, while Section IV concludes.

II. METHODOLOGY

A focus on commodities and gold Common themes have emerged from the literature focused on commodities and announcements. The number and significance of macroeconomic announcements on commodity prices is lower than that for U.S. Treasury bonds, exchange rates, and equity markets. However, a number of key U.S. indicators, including inflation, GDP, and employment statistics, repeatedly show the ability to move some commodity prices; in general, energy products have tended to be less sensitive, while gold has been most sensitive.

Gold also appears sensitive to news related to supply and demand. In particular, some studies indicate that central bank announcements regarding sales of gold reserves have tended to cause price declines—see Cai, Cheung, and Wong (2001). Other studies have found that gold’s sensitivity to news varies through time, with Hess, Huang, and Niessen (2008) presenting evidence that it is dependent upon the state of the economy, with sensitivity increasing during recessions.

A. Literature Review Asset prices and macroeconomic announcements

B. Data

Previous literature on the impact of macroeconomic announcements has mostly focused on bond and currency markets, with fairly clear evidence that macroeconomic news has significant price and volatility effects. Rossi (1998) finds that certain key economic announcements cause U.K government bond yield changes of between 2–6 basis points, including beyond the trading day. Fleming and Remolona (1999) find that the arrival of public information has a large effect on prices and subsequent trading activity, particularly during periods in which uncertainty (as measured by implied volatility) is high. Balduzzi, Elton, and Green (2001) indicate

Commodity prices We use daily price data for 12 commodity futures contracts that have available price data over the period from January 1997 to June 2009. We have included precious metals, base metals, energy, and agricultural commodities. Futures prices are taken from the nearest contract often used as the benchmark for that commodity and traded on exchanges in the United States.

We focus on the futures market, rather than the spot market, for two reasons. First, the spot market for some commodities,

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The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity? • 7

fsrforum • volume 13 • editie #4

including certain precious and base metals, is dominated by trading in London, which means that official fixing prices have less time to respond to daily developments in the United States due to the five hour time difference.1 Second, spot prices are often positively correlated with the future with a one-day lag, which indicates that the impact of U.S. announcements on the futures price is likely to affect the spot price the following day (see the example for gold in Table 2). This is consistent with previous research indicating that commodities futures markets lead developments in spot markets (e.g. Antoniou and Foster (1992) and Yang, Balyeat, and Leatham (2005)).

as the U.S. dollar. However, we also include ECB and Bank of England interest rate decisions and the German IFO business climate survey; the IFO indicator was the only Euro area indicator shown to influence the U.S. dollar - Euro exchange rate in Ehrmann and Fratscher (2005). Commodities are traded globally and news from other emerging economies, particularly China given the growth in its demand across a wide range of products, may also influence prices. For now, the number of observations available to assess formally the impact of Chinese macroeconomic announcements is limited, which makes us cautious about their inclusion. However, this clearly remains a fertile area for future research.

Table 2. Gold Futures and Spot Prices - Correlation Matrix 1/

C. Estimation Strategy The problem with ordinary least squares (OLS)

Same day

Previous day

Gold future

Gold spot

U.S. dollar

Gold future

Gold spot

Gold future

1.00

0.26

-0.44

0.00

0.02

U.S. dollar -0.02

Gold spot

0.26

1.00

-0.19

0.72

-0.06

-0.31

U.S. dollar

-0.44

-0.19

1.00

-0.03

0.01

-0.0

Source: Authors’ estimates.

1/ Correlation coefficients in bold are significant at the 5 percent level.

While many recent announcement studies use intraday data, we use daily data, finding the arguments of Erhmann and Fratzscher (2005) in support of daily frequencies to be convincing. They note that Payne (2003) provides evidence of liquidity effects causing trades during the minutes following a news event that are not necessarily a response to the fundamental content of that news - e.g. trades based on participants covering a short position to reduce risk. Also, it may take longer than a few minutes for markets to absorb the significance of news events. For many commodities, which are often perceived to react to the response of other financial variables such as exchange rates (see below), this may be particularly relevant.

The main objection to daily data - that it is noisy and polluted with many other market events - is a minor concern if we make the reasonable assumption, based on efficient market assumptions, that non-announcement shocks on the release dates of specific reports are white noise and unbiased.

The simplest way to assess the significance of specific announcements is by estimating regressions in which the log change in the futures price Δp is the dependent variable, J surprise elements of the news announcements Zi including K -1 lags, and L lags of the price return are the exogenous variables, and ε is the unexplained portion of the price return: (2) This may be estimated using OLS, but the most obvious objection to this approach is that the price return variance of many commodity futures exhibit periods of high and low ­volatility, or heteroscedasticity. This violates the assumptions of OLS and leads to inefficient estimators. We find very strong evidence for commodity price volatility time-variation and clustering (see Appendix Figures A1 and A2).

A GARCH approach When asset return volatilities exhibit time-variation and clustering, a GARCH specification, which jointly models price returns and volatility, is often appropriate.2 In this model, the conditional variance of asset price returns ht is assumed to be a function of lagged values of the unexpected return εt-1 to εt-q and the conditional variance ht-1 to ht-s. The model can be written as:

Macroeconomic announcements Commodity prices, in common with financial assets, incorporate expectations regarding the future. As a result, the impact of news announcements should focus on the surprise component of the news. A popular technique, which we use here, is to measure the surprise by the distance between the actual outturn Xt and the publicly-observable consensus estimate Et-1(Xt ), scaled by the sample estimate of the variation in the announcements σX . The surprises may be interpreted as standard deviations from the consensus: (1) We use the analyst consensus estimates published by Bloomberg for each announcement and select a set of 13 monthly or quarterly U.S. macroeconomic announcements from those included by Ehrmann and Fratscher (2005), with some substitutions, including the Employment Cost Index and Existing Home Sales. We focus mainly on announcements about U.S. macroeconomic developments since these have been shown to have the greatest influence on variables such

8 • The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?

where

(3)

There are many variations on the GARCH theme but some studies have indicated that a simple GARCH (1,1) model with one lag of the squared residual and one AR term - often outperforms other more complex specifications (Hansen and Lund (2005)) and we use this specification. However, our analysis of the volatility process for most commodities suggests that the conditional variance is sensitive to unexpected return shocks with lags of greater than one day (see Appendix Figure A2). Also, formal tests on the residuals of GARCH (1,1) estimations still show the presence of heteroscedasticity for some commodities. To account for these features of the data, we present Bollerslev and Wooldridge (1992) standard errors, which are consistent in the presence of any remaining heteroscedasticity. We used likelihood ratio tests to identify

the appropriate lag lengths and found that K =2 and L =2 in most cases.3

Controlling for the U.S. dollar effect The model given by equation (3) may be missing one important aspect of commodity prices - a high sensitivity to other financial variables. For example, macroeconomic news may exert an indirect influence through a commodity’s role as an effective hedge against lower interest rates or a depreciating U.S. dollar. In other words, might sensitivity to announcements merely reflect a relationship between the commodity and other financial assets, rather than the announcements themselves?

To address this, we also include the U.S. dollar exchange rate in our analysis, as there is strong evidence that commodity prices have been sensitive to the U.S. dollar over a long

“Good news”—“bad news” and volatility effects Up to now, our analysis assumes that commodity price sensitivity to announcements is symmetrical and constant over time. However, the asymmetrical nature of commodity markets suggests that it is reasonable to question these assumptions.

We explore two possible factors that might condition the response of commodity prices to announcements: first, do recent volatility patterns influence this sensitivity?; second, does it matter whether the news is “good” or “bad”?

By conditioning the price response, we lose observations and increase the number of coefficients to be estimated and with a sample size of a little over 10 years, this may leave insufficient information to capture these effects. Consequently, following earlier studies, we use a composite indicator for these conditioning models (see Galati and Ho (2003) and Erhmann and

We assume that all causality runs from the U.S. dollar to the commodity price period (Roache (2008)). We assume that all causality runs from the U.S. dollar - measured using the Federal Reserve’s trade-weighted index against major trading partners - to the commodity price.4 This assumption is not uncontroversial, as commodity prices may influence exchange rates, at least for economies for which commodities account for a large share of exports or through the emerging sovereign wealth fund (SWF) channel. However, recent evidence suggests that exchange rates play the dominant role as forcing variable see Chen, Rogoff, and Rossi (2008) and Clements and Fry (2008).

We add the U.S. dollar index log change as an exogenous variable (Δe), including M lags, which would tend to introduce multicollinearity assuming the exchange rate is affected by economic announcements. The mean equation of the GARCH model (3) then becomes: (4)

Fratscher (2005)). This composite aggregates the surprise element of the announcements into a single series, greatly simplifies the model, and increases the number of observations. The following analysis uses only U.S. announcements.

The composite is the sum of the standardized scores for each announcement, excluding monetary policy shocks, and we do not impose any sign changes on these scores.5 6 We compare our results against a base model that estimates the regression of the log change in the gold price Δp on to a constant α, the contemporaneous value and two lags of the composite indicator Z, and two autoregressive terms: (5) To assess whether volatility - often used as a measure of investor uncertainty - affects commodity price sensitivities, we condition our analysis on the level of gold price volatility over the preceding 30, 60, and 90 days. We classify an announcement as arriving in a high-volatility period if the

»

The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity? • 9

fsrforum • volume 13 • editie #4

daily standard deviation of the commodity price for this period is above its sample average and vice versa for low volatility. The mean equation for the GARCH model then becomes:

weak. U.S. retail sales, non-farm payrolls, housing starts, and the ISM survey tend to be the most influential indicators.

The German IFO survey is also a strong influence, particularly for base metals, even when controlling for the effect of the U.S. dollar.

(6) For the good news-bad news model, we define “good news” for the U.S. economy as an announcement surprise that should lead to an increase in the price of cyclically-sensitive assets; this would include higher-than-expected GDP growth, industrial production, non-farm payrolls, consumer confidence, or inflation. Of course, unexpectedly higher inflation is not necessarily “good” news for the U.S. economy, but we have classified this as good news, since it should, a priori, lead to an increase in commodity prices. The mean equation of the GARCH model we estimate can then be written as: (7)

III. RESULTS A. Scheduled Macroeconomic Announcements A number of macroeconomic announcements from the U.S. and the Euro area impact commodity prices. Some commodity prices rise in response to announcements revealing a higherthan-expected level of economic activity. The results are not consistent across commodities, with energy products tending to exhibit little sensitivity, consistent with the findings of Kilian and Vega (2008). However, agricultural products and base metals show some evidence of pro-cyclical price sensi-

For gold, this apparent counter-cyclicality in the very shortterm contradicts the results from earlier research using sample periods that stretch between 1970 and the early 1990s. Previous work had tended to find that the gold price was pro-cyclical; i.e. it rose when U.S. inflation increased or activity indicators strengthened by more than the consensus had anticipated. Our results do not imply that the inflationhedging properties of gold have diminished, but instead suggests two features of gold: first, in the short-term sensitivity is higher to market expectations for real interest rates; second, gold is seen as a safe-haven during “bad times”.

The shift to a more pro-active U.S. monetary policy stance in the 1980s effectively substituted real interest volatility for inflation volatility. This implies that positive inflation surprises increase the probability of counter-cyclical monetary tightening and higher real interest rates, which tend to appreciate the U.S. dollar and depress gold prices, see Kaul (1987) for a similar argument for equity markets. Over longer time horizons than 1-2 days, the evidence suggests that real interest rates may be less responsive to inflation surprises than the market had feared, which can ultimately lead to positive effects on the gold price from inflation shocks, as noted by Attié and Roache (2009).

Commodities are not just financial assets and gold is not just another commodity. tivity, which increases when we control for the typically inverse relationship of these commodities with the U.S. dollar. In contrast, gold prices tend to be counter-cyclical, with the price rising when activity indicators are surprisingly

10 • The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?

We also find that Euro area indicators that point to stronger activity or higher interest rates tend to increase the gold price and depreciate the U.S. dollar, providing further evidence of gold’s dollar-hedging characteristics. Indeed, the

U.S. dollar’s influence is unsurprisingly strong for gold, with the effect of some individual announcements losing significance when a control for this relationship is included in the model. In contrast, the pro-cyclical sensitivities are heightened for other commodities once we add the U.S. dollar as a regressor.

Where it is significant, commodity prices tend to be inversely related to Federal Reserve interest rate surprises, confirming the results of previous research. Even crude oil, which is quite insensitive to most news events, has exhibited this relationship since 2001. However, we found very few occasions for which the market has been surprised by the interest rate announcements following regularly scheduled FOMC meetings and these results are influenced by a small number of data points. There are more data points for ECB interest rate surprises and, when controlling for the U.S. dollar, there is ­evidence that precious and base metals prices are inversely related to interest rate shocks.7 We also included U.K. interest rate decisions, but the results were strongly influenced by the very large surprise rate cut in November 2008. Excluding this outlier, U.K. interest rate decisions were not significant.

The conclusions are qualitatively similar when we break the sample into two sub-periods based on the trend of the broad CRB commodity price index. During the first sub-period from 1997 to November 2001, this index was either trending lower or trading within a range, while the second period, from December 2001 to March 2009, is characterized by a sharp rise and subsequent decline.8 Our aim in this analysis is to assess whether short-term price dynamics have changed due to the increasing commodity market participation by financial investors. The number of indicators affecting prices and the degrees of pro-cyclical sensitivity among non-gold commodities has tended to rise since 2001, but the overall results outlined above remain intact.

B. “Good News”, “Bad News”, and Volatility Gold price more sensitive to “bad news” Results indicate that there are few commodities for which the good-bad news distinction makes any difference, with one exception being gold—bad news affects the gold price much more than good news (Table 6). The coefficient on the bad news aggregate is statistically significant and much higher than that on good news, a result that is maintained even when we control for the U.S. dollar (Table A7). We also show the effect on the U.S. dollar which is, perhaps unsurprisingly, symmetric for both types of news. This is consistent with the view that gold is a safe haven and financial assets - in this case gold futures - experience greater volatility during periods in which economic or financial conditions deteriorate. There is also the potential for significant non-linearities in gold price sensitivities, although we do not address that possibility in this paper.

IV. CONCLUSION Our results suggest that commodities are not just financial assets and gold is not just another commodity. Some commodity prices are influenced by the surprise element in macroeconomic news, with evidence of a pro-cyclical bias, particularly when we control for the effect of the U.S. dollar.

Commodities tend to be less sensitive than financial assets for example, crude oil, the most actively traded commodity futures contract, shows no significant responsiveness to almost all announcements. However, as commodity markets have become financialized in recent years, so their sensitivity appears to have risen somewhat to both macroeconomic news and surprise interest rate changes.

The gold price is sensitive to a number of scheduled U.S. and Euro area macroeconomic announcements - including retail sales, non-farm payrolls, and inflation. Gold’s high sensitivity to real interest rates and its unique role as a safe-haven and store of value typically leads to a counter-cyclical reaction to surprise news, in contrast to their commodities. It also shows a particularly high sensitivity to negative surprises that might lead financial investors to become more risk averse.

These results have a number of implications. To reduce the uncertainty of the return on gold transactions, traders may wish to time their orders flow so as to avoid the release of information that has been shown to affect prices. For longerterm market participants, these results provide confirmation of the pro-cyclical bias of many commodities and gold’s role as a safe-haven during periods of economic uncertainty.

Looking forward, one key issue will be the extent to which increasing financialization heightens the sensitivity of commodities to macroeconomic developments.

References on request

Notes

1 For example, the London Bullion Market Association’s “fixing price” is determined by an open process at which market participants can transact business on the basis of a single quoted price, which is adjusted until the market clears. The fixing is conducted twice a day at 10:00am and 3:00pm London time.

2 GARCH is an acronym for generalized autoregressive conditional heteroscedasticity.

3 Details on the GARCH and likelihood ratio tests available from authors by request.

4 Many commodity prices are correlated with other asset prices, but our focus is on the U.S. dollar due to the significantly inverse relationship between the two variables over a long period of time. Indeed, commodities are often viewed as a hedge against U.S. dollar depreciation versus other major currencies with large financial market-related turnover, such as the yen, the Euro and the pound sterling. Compared to the broader IMF nominal effective exchange rate index, the narrower coverage of the Federal Reserve’s exchange rate index provides cleaner exposure to these currencies.

5 In other words, the composite adds together the standardized surprises as calculated by equation (1) for each day. On a day with no announcement, the composite will have a value of zero (signifying no news). On a day with just one announcement, the composite’s value will be the standardized surprise of that announcement. On a day with more than one announcement, the surprise will be the summation of the individual standardized scores.

6 The results are robust to the inclusion of monetary policy shocks. We excluded them to allow comparisons with previous literature.

7 It is important to control for the U.S. dollar in this case as the U.S. dollar will tend to appreciate (depreciate) when the ECB unexpectedly cuts (hikes) its benchmark policy interest rate.

8 Chow tests based on breakpoints around November 2001 indicate that it was not possible to reject the null hypothesis of model stability over the entire 1997-2009 sample at the 5 percent level for almost all commodities.

Gold price more sensitive when uncertainty is high For the U.S. dollar we confirm the standard result that sensitivity is higher following a period of elevated volatility. For almost all commodities, except gold, however, the type of news does not have a significant impact. The impact of news on gold is stronger following periods of volatility, but only when we control for the U.S. dollar (Table A7).

The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity? • 11

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fsrforum • volume 13 • issue #4

The Role of Gold in the New International Financial Architecture: Moving to a ‘Hard SDR’ Dr. Nasser Saidi and Dr. Fabio Scacciavillani1

Introduction This paper examines whether gold can assume a new function in the global financial markets taking shape in the aftermath of the crisis. The argument revolves around two points: 1) the role of gold as a hedge against specific risks, such as inflation outbursts or financial contagion; 2) the role of gold as numéraire for international transactions and therefore as an international reserve asset.

In relation to point 1) the paper stresses the danger of a fiscal overhang from the financial crisis and the inflationary pressure building up from unprecedented level of public debt in peace time. In relation to point 2) it examines the future of the US dollar as the dominant international reserve currency in a world that is increasingly multipolar, hence evoking analogies with the second half of the XIX century and the early years of the XX. The starting point will be the notion that the recent financial crisis has accelerated the shift of the global economic epicentre from the mature economies of North America, Western Europe and Japan towards the emerging markets, primarily China, India, Brazil, and Middle East. Demographic factors and the long term benefits of institutional and structural reforms have set in motion a virtuous circle of development that has led to a decoupling of the emerging markets economic performances from those of mature economies.

This dynamics is paving the way for a multipolar world where it will be increasingly difficult for a single country to provide the reserve currency, because its relative size in the world economy would be too small compared to the growing volume of global trade and financial transactions. Specifically, the United States would not be in a position to continue running a large current account deficit adding indefinitely to their liabilities (and debt service), without putting under severe strain their economy and their capability of borrowing internationally in dollars and servicing their debt obligations. In short, the accumulation of foreign liabilities can continue only as long as the external debt service is sustainable.

Furthermore the crisis has irremediably sapped investor confidence in paper assets. By contrast, the appeal of gold as a safe haven asset has been enormously boosted and its price has been bid up accordingly, even when commodity prices

plunged during the most acute phase of the crisis. The role of gold in the new international financial architecture hinges on whether this phenomenon represents an emotional, but largely erratic, reaction by frightened investors to unsettling circumstances, or highlights a fundamental property of gold as a hedge against extreme events. A decisive answer cannot be given because a theoretically sound gold valuation model does not exist, so we need to rely on circumstantial evidence and historical experience.

The Dollar as a Declining Reserve Currency “A fundamental reform of the international monetary system has long been overdue. Its necessity and urgency are further highlighted today by the imminent threat to the once mighty U.S. dollar. “Robert Triffin (1960)2 The hegemonic position of an international currency derives primarily from the relative size of its underlying economy, its openness and the size of its financial markets. It is reinforced by the legal system reinforced by the military reach of the issuing government and the long term stability in purchasing power over goods, services and assets that it affords (i.e. sound and sustainable macroeconomic & fiscal fundamentals).

The rise of the dollar as the principal international reserve currency was a natural consequence of the US ascendance to the top of world economies combined with the solidity of its political system. However the transition from the dominance of the British pound to that of the US dollar was rather slow even after the 1870s when the US had become the largest national economy. One can argue that the US dollar dislodged the pound as the dominant currency only when the gold standard came under strain and was reneged by Britain in 1931, while the US re-established the dollar peg to gold at $35 per ounce. In short, the size of the US economy was key, but the stability conferred by the backing of gold was the tipping point that led to a dollar-centric system.

How important is the relative size in underpinning the status of reserve currency? The answer can be put in relation to the insight by the Belgian economist Robert Triffin3 in the 1960's that a the country whose national currency serves as an international reserve currency must run a current account deficit to supply the global liquidity required for international transactions.

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Recent financial crisis has accelerated the shift of the global economic epicenter towards the emerging markets.

The size of the economy must be large enough to sustain a current account deficit sufficient to finance international transactions, but the deficit cannot be so large as to make the ensuing debt service unsustainable. In other words, any country that issues a reserve currency must be willing to import more than it exports but is exposed to the risk that its external debt burden will undermine its stability.4 To be accurate, the liquidity could also be provided by a deficit of the private capital flows (and indeed it was the case for the US in the ‘60s) or it could be supplied by entities in other countries that issue liabilities denominated in the reserve currency (as happened in the ‘70s).

But in practice these are exceptions and in fact the bulk of international liquidity over the past two decades has been supplied by a widening current account deficit in the US. Therefore the key issue is whether the US can continue to provide the indispensable volume of assets. The answer can hardly be positive, because the US deficit is clearly unsustainable (and the current US Administration is determined to reduce it as a matter of priority), while emerging countries continue to accumulate reserves at a pace close to their (growing) current account surpluses. In plain words, if the United States adds further to its external liabilities, the privilege of borrowing internationally in its own currency might be jeopardized.

Some figures might help to illustrate the problem. According to WTO data, in 1948 total world merchandise export (excluding re-export) was 58 billion; in 1971, at the time of the Bretton Woods demise, total world export had grown to US$354 ­billion; in 1995 when the trade liberalization started to take off after the launch of the WTO, the figure had reached US$ 5.2 trillion and in 2008 total exports touched the highest level at US$ 16 trillion, to drop to US$ 12.5 trillion in 2009.

To this we need to add trade in commercial services which were about US$ 300 billion in 1980 (when the WTO series starts) to almost US$ 4 trillion in 2008 and a little more than US$ 3 trillion in 2009.

The external liabilities of the US, measured as the difference between foreign assets owned by US residents and US assets owned by nonresidents went from almost zero in the early 1990s to almost US$ 4 trillion in 2008 and then declined sharply to just short of US$ 3 trillion (see Fig. 3).

14 • The Role of Gold in the New International Financial Architecture Moving to a ‘Hard SDR’

Fig 3 – US External Liabilities

Source: US Bureau of Economic Analysis

On the other side, global foreign currency reserves by central banks amounted to US$8.1 trillion by the end of 2009 according to the US Treasury, with China having amassed US$2.4 trillion, enough to cover the short-term debt of the twelve largest reserve-holding emerging markets and still maintain an adequate buffer in case of a crisis. It is also worth pointing out that other phases of rapid large reserves accumulation (such as at the end of the 1960s and the end of the 1970s) have led to monetary or financial crises because the need to recycle these funds in the economy led to imprudent lending practices by banks.

A solution to the increasing inability of the US to provide the reserve currency could be envisaged along two hypotheses: either one, or a few other, reserve currencies emerge or a new international unit of account (an international currency) managed by a supranational institution needs to be designed.

The former case seemed to be arising with the introduction of the Euro, a currency backed by a diversified economy larger than the US, capable of withstanding major shocks.

However the Euro area has not been able to match the expectations because it has largely failed to integrate its financial markets, and because the ECB, following the tradition of the Bundesbank, has been cold, even hostile, to the international role of the Euro lest it would conflict with its overriding mandate of ensuring price stability. So the Euro area does not have the deep and broad financial markets and does not supply sufficient liquid and safe assets to satisfy the demand by reserves-accumulating central banks and by the banking and financial system. The ascendance of the Euro is also constrained by a government bond market fragmented along

national lines, Europe’s unfavorable demographics, and anemic growth. If one adds the dysfunctional institutional framework after the emasculation of the Stability and Growth Pact, the absence of a lender of last resort (although the current crisis has forced the ECB to act as one by injecting massive liquidity in the banking system and buying government debt in a blatant violation of the Amsterdam Treaty), a lack of centralized decision making on fiscal policy, it is evident that the appeal of the Euro is not widespread. It must also be noticed that the currencies of the largest surplus countries in Asia are currently tied to the US dollar and trade primarily in that currency, so they prefer to hold US dollar denominated assets.

We need to add that the world’s second largest economy issues a currency which is not freely convertible and the Chinese financial markets, including the government debt market, are at present far from deep, liquid or well regulated and are not accessible by foreign investors. A complete convertibility of the Yuan is several years (possibly a decade) away according to most analysts. In the meantime capital controls and other regulations continue to cause a steady rise in China’s foreign currency reserves, at an average monthly rate of US$10 billion. Finally the other major economy, Japan, maintains a large current account surplus so it does not provide substantial international liquidity either and has the second largest stock of foreign currency reserves at over US$ 1 trillion.

In conclusion, an orderly transition towards a multicurrency world requires some profound institutional changes in the current international monetary arrangements, in the absence of which the transition risks to be disruptive.

The plan for an international currency managed by a supranational institution dates back to the proposal advanced by Keynes at the Bretton Woods Conference who called for an International Currency Union, which would function as a "central bank" for the central banks of each country and to institute a global currency, the Bancor.

More recently the Chinese authorities and the G20 have renewed the emphasis on the SDR. A flurry of research and policy papers has reinforced the message5 with the IMF already developing a framework.6 The G20 Summit in

Toronto supported a general allocation of the IMF's Special Drawing Rights equivalent to $250 billion to boost global liquidity. A general SDR allocation amounting to the equivalent of $250bn was made on 28 August 2009. The equivalent of nearly $100bn went to emerging markets and developing countries, of which LICs received over $18bn. To support SDR liquidity, the IMF has substantially expanded the capacity of voluntary arrangements to buy and sell SDR in exchange for currencies in the SDR basket. The G-20 also urged a speedy ratification of the Fourth Amendment to the IMF's Charter, first proposed in 1997, which seeks to make the allocation of SDRs more equitable. The Fourth Amendment became effective for all members on 10 August 2009. As a result, a special one-off allocation of SDRs, amounting to about $33bn, was made on 9 September 2009. More recently, On April 21, 2010, the IMF’s Executive Board approved measures to facilitate the mobilization of Poverty Reduction and Growth Trust (PRGT) loan contributions, including from the existing SDR resources. As of April, 21, 2010, pledges of PRGT loan contributions amounting to SDR 7.6 billion had been made, of which SDR 6.1 billion are to be provided in SDRs by six countries.

The Value of Gold and its Role as an Anchor The Great Recession has brought to the fore the tension between (1) the scale and volatility of global capital flows, which motivates ever larger international reserve buffers, and (2) the destabilizing imbalances arising from a monocurrency international monetary system. These tensions are exacerbated by the evolution towards a multipolar world reminiscent of the first wave of globalization that took place at the turn of the XX century and culminated right before WWI. In that period several currencies periodically shared the role of the global reserve currency (Eichengreen (2005)).

Indeed, a multipolar world is more the norm than the exception from a historical perspective, hence a system of co-currencies is more natural compared to the situation prevailing since WWII. Can gold play a role in a multicurrency fiat currency environment resulting from a multipolar economic map?

Gold has unique physical properties (malleability, conductivity, resistance to oxidation) and is very scarce which in part explains the fascination it has enjoyed since the night of times. Despite skepticism in academic circles, many individual and institutional investors view gold as a store of value which

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provides protection when other assets prices are plunging.

This gives rise to the “asset demand” for gold bullion by central banks, fund managers, and households, as opposed to “use demand” by various industries.

The notion that gold is a hedge against a host of extreme events is based on a pattern of correlation and stable relative prices. For example the gold-oil price ratio which has remained within a well-defined range since 1971 and even before.7 Other secular stable relationships are illustrated in Harmston (1998). In short, gold maintains real purchasing power over time even though gold does not provide a stream of earnings.

The gold price can be affected by several factors such as US or global inflation, world GDP growth, currency fluctuations, risk aversion, flight to safety, gold leasing rates, interest rates, rate of extraction, sales by central banks, stock prices, and possibly many others. There is an extensive literature that examines jointly several of these factors or focuses on one deemed to be predominant (e.g. currency fluctuations).

The empirical analyses (with few exceptions ) tend to find to a various degree statistical linkages between the gold price and various macroeconomic variables, over different periods and through different techniques.

In general as we look at historical data two stylized facts emerge clearly: the gold price tends to spike in conjunction with high inflation periods or in times of severe slumps threatening to turn into depression and/or triggering a deflation.

In essence gold represents a financial safe haven when the consumer price index is highly unstable (and volatile) and when the probability of extreme events (or ‘black swans’ as they have come to be described) is perceived to be unusually high. This function, which in the so called era of Great Moderation had been largely dismissed, came back forcefully during the sub-prime crisis. A recent IMF study9 finds that gold prices tend to be counter-cyclical, with the price rising when there is a downside surprise in the data, suggesting gold is seen as a safe-haven during “bad times” and concludes that: “gold prices react to specific scheduled announcements in the United States and the Euro Area (such as indicators of activity or interest rate decisions) in a manner consistent with its traditional role as a safe-haven and store-of value…”.

Nevertheless skeptics maintain that past evidence and past

16 • The Role of Gold in the New International Financial Architecture Moving to a ‘Hard SDR’

correlations are not solid enough to justify a renewed role for gold in the international monetary system. Their skepticism rests on the failure to identify a value theory for gold. ­Psychological attitudes and long standing practices, they underscore, might swing, hence unless one can explain how inflation, exchange rates and other factors may -- together or singularly -- affect gold prices, the inclusion of gold in a global portfolio is nothing more than an act of faith rather than a rational decision. Stated differently, one should be able to define a stable link between a unit of gold and a ­representative basket of goods (and services) or a stream of financial yields before a case can be convincingly made.

However, the same criticism applies to many (if not all) asset classes. Equity valuation models are based on formulas that, albeit formally neat, have limited and unreliable application in real life. For example, to assert that a share value depends on the expected future cash flows has little practical usefulness.

Even the price of a major commodity such as oil, which is used all over the world and whose market is continuously scrutinized by hundreds of thousands operators cannot be explained, let alone predicted by any rigorous model.

In essence gold is a form of “money” whose value in terms of a basket of goods and services is mostly uncorrelated with the value of major fiat currencies and in particular circumstances, such as heightened tensions in financial markets, security threats, high inflation, tends to increase when measured in terms of fiat currencies. Gold is perceived as a hedge against extreme events and hence its price is dictated by the assessment that investors or some classes of investors make of those risks.

Fig 4 - Average Gross General Government Debt-to-GDP Ratio

Source: IMF

Gold is perceived as a hedge against extreme events.

Central banks still hold a substantial portion of gold stocks.

In this sense gold can be considered a sort of fiat money of different nature.10 Those who favor a central role for gold as a global unit of account argue that it is the only form of money that is not a government's liability and therefore is not subject to the vagaries of political objectives. Such a property is crucial in current times when the government liabilities are swelling and as a consequence expectations are mounting that central banks will eventually monetize those fiscal problems. The view is supported by historical experience which suggests that virtually all severe fiscal crises have been largely resolved by inflating the debt away.

Moving to a Hard SDR We have argued that in a multipolar economic geography, with a decentralized international financial system, a single reserve currency issued by a country whose relative economic share is dwindling, exposes the world economy to severe instability and becomes a source of global systemic risk. The viable solutions rely either on a multicurrency system without major government intervention or on an international currency backed by the largest economies. The first alternative could prevail by default if there is no international consensus on a reform of the international monetary system but is not inherently stable as it is exposed to market determined exchange rate swings between free floating reserve currencies.

For the second alternative a candidate already exists: the SDR, which is the reserve asset created in 1969 through the IMF. It is essentially a virtual unit of account used in transactions among central banks, a stripped down version of the Bancor proposed by Keynes. The current arrangement backing the SDR however is inadequate. The SDR is not a currency strictu sensu, nor a claim on IMF assets, but is potentially a claim on convertible currencies of IMF members.11 It is a form of fiat money (or liquidity to be more precise), whose supply is determined by the Board of Governors of the IMF and d­ istributed to member countries in proportion to their quotas. The total stock of SDR amounts to 204 billion (equivalent to more than USD300 billion). The largest SDR allocation ever, 161.2 billion, became effective on August 28, 2009 implementing a decision taken by the G20 leaders in April 2009 for the IMF to take a pivotal role in addressing the many crisis hotspots ravaging the world economy.

This increased SDR supply however is not large enough to address the fundamental imbalances and to provide a significant alternative to dollar denominated assets in central bank reserves. The revamp of the international monetary system around a completely new currency and the supporting institutional arrangement would be a daunting task with likely insurmountable political obstacles. Merely increasing SDR issuance would not, however, be adequate. In fact it would not only be a matter of shifting the dollar denominated reserves into SDR. The SDR itself is backed by the economies of IMF members, so for the exchange of US$2 trillion in US Treasuries held in central banks reserves for IMF bonds to be acceptable would require the formal backing of all major IMF members, otherwise it would only give rise to a devastating degree of confusion on international markets. Or it could be perceived as a mere redenomination of liabilities because the SDR would be backed to a large extent by the US Treasury.

In other words, for the SDR to be an alternative reserve currency not only must the total issuance be greatly boosted but it would need additional backing and arrangements – in other words a “hard” version of the SDR must be created. It would be desirable to create a new SDR basket and include in it an asset whose value is largely uncorrelated with the value of fiat currencies. Gold would be the natural candidate with backing for the gold proportion coming initially from the IMF’s gold stock. Given that the IMF still holds substantial gold reserves, an SDR basket where the weight of gold would be between 20-25% could be reasonable.

To provide a rough estimate of the order of magnitudes involved to maintain such an arrangement we considered the total amount of official central bank reserves as recorded by the IMF which amounted to the equivalent of US$ 8.4 trillion in June 2010. Then we projected a growth rate of 5% for the total value of reserves (a rate that would reflect growth of trade volumes and international transactions in real terms) over the next 15 years. Lastly we assume that about two thirds of the reserves will be kept in US dollars and half of this amount would be shifted in “hard” SDR, i.e. an SDR linked to a hybrid basket including a 20% share of gold, plus 20% euro, 8% yen 30% US dollar, 15% Yuan, 7% other currencies (Indian rupee, Swiss Franc, British Pound assuming the UK will not adopt the euro). As is the case today for the SDR, the weights underlying the “hard” SDR would be

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There is no international consensus on a reform of the international monetary system.

reviewed periodically (every 3 or 5 years) in order to take into account the changes in the relative trade, financial and overall economic importance of the national currencies.

The value of gold that the IMF would need to hold in order to fully back such a commitment would be in the order of 27,000 metric tons of gold, if the price remains fixed at around 1300 US$ per Troy ounce, i.e. about ten times its current gold holdings and close to the total gold held by central banks. Likewise, if half of the projected total central bank reserves in 2025 were to be held in hard SDR, the “gold content” of the SDR would be equivalent to 42,000 metric tons.

However, the IMF would only need to maintain a fractional gold reserve, sufficient to exchange gold for currencies on demand by central banks of member countries at market price. In fact the hard SDR would not imply a fixed price for gold in any currency, but it would be partially anchored to a unit of account independent of the vagaries of national monetary policies.

In any case the transition would be gradual, but it could be strengthened if the central banks of countries with large dollar denominated assets were to consider repo facilities in SDR and accept as collateral SDR denominated securities. In this way their banking systems and their economies could adapt more easily to the new multipolar world and would be in a position to better manage its challenges.

Conclusions The international monetary system, as the economic ­epicenter shifts eastwards, would be enhanced by a partial anchoring of an international means of payment to gold. In essence the history of the XX century is pervaded by the rise of the US dollar as the dominant reserve currency, in conjunction with the prominence of the US economy in the world. But this state of affairs is increasingly challenged.

While a comprehensive theory of gold valuation remains ­elusive and hence the gold price depends on an ancestral function as a store of wealth, its role as an anchor in the new financial architecture cannot be downplayed for three reasons: a) the world is heading towards a multipolar economic configuration reminiscent of the first phase of globalization at the turn of the XX century; b) the role of the US dollar as a

18 • The Role of Gold in the New International Financial Architecture Moving to a ‘Hard SDR’

reserve currency is creating a set of serious tensions between domestic stability in the largest economy and the liquidity needs of an increasingly integrated world; c) mature economies are facing a public debt and fiscal crisis with the non-negligible risk that governments will want to inflate away their debt rather than raise taxes, reduce social and entitlement programmes and/or increase retirement age to postpone and reduce social security liabilities and other entitlement benefits.

In general, the international monetary system (which is the most important component of the global financial architecture) can either hinge on a system of fixed (or semi-fixed) exchange rates among major currencies or be left to market determined floating exchange rates (which does not exclude the occasional intervention by central banks or even some form of “dirty” float).

The two systems differ in the way they tackle the inevitable imbalances or divergences that periodically arise among major economic areas. In the former, a multilateral arrangement among governments to address growing current account surpluses in one or a few countries (and the secular deficits elsewhere) is necessary (even if it conflicts with domestic objectives). This was the original function of the IMF within the Bretton Wood regime. In the latter the adjustment takes place through the nominal exchange rates and is left largely to the private sector. Neither system is free of risk or disruptions. Indeed, the international monetary system has oscillated between the two systems over the past two centuries. In the last 20 years an unusual hybrid has prevailed, with certain major economies linked by fixed exchange rates (US and China, together with other East Asian and Middle Eastern countries) while other exchange rates, in particular the Euro-dollar and the Yen-dollar, were floating.

It is doubtful that this arrangement can be perpetuated and in particular the reserve currency role of the US dollar is coming under growing strain as the relative size of the US economy shrinks. The reserve currency status allows a number of privileges in terms of seignorage and access to global savings. In particular the US can borrow easily even at critical junctures and sustain large debt-financed commitments both domestically and internationally. Even though the US represented the epicenter of the crisis, US dollar

denominated assets, foremost US Treasury securities, were considered – counter-intuitively – a safe haven. But these privileges are imposing non-trivial costs to the rest of the world and also to the US which has to maintain a sizeable current account deficit with an unsustainable increase in its foreign liabilities and debt service.

The US dollar is currently widely accepted because the US economy is large and diversified and has financial markets with the requisite breadth, depth and liquidity. Holders of dollars expect to be able to purchase goods and services they need paying in dollars. But the primacy of the dollar has been the result of unusual historical circumstances, not the result of long term equilibrium. In short, the size of the dollar liquidity necessary to finance global trade and capital movements will in the foreseeable outweigh the size of the US economy.

In a multipolar world where the economies of China and Euroland have a size on par with that of the US, the international role of the dollar would come increasingly under strain. Furthermore, the significant role played by other countries, such as Brazil, the GCC, Korea, South Africa, on the world stage will lead to a more decentralized network of regional financial centers unlikely to be revolving only around the US dollar. The rise of China, India and other emerging markets will lead to a multicurrency international monetary system. But even in a multipolar financial world, it would be desirable to have a global unit of account as an anchor for international transaction. The currency of a primus inter pares is unlikely to confer the trust necessary for the global store of wealth, especially in a period where its public finances are not in order and the temptation to inflate away its debt looms. From historical experience and empirical evidence one can argue that gold acts primarily as a hedge against financial downturns and wild swings in the price level (during periods of inflation or deflation).

standard heydays or the Bretton Woods system -- but nevertheless significant. One possibility would be to include gold in a basket underlying the new “hard” SDR. If the IMF currency were to assume a more relevant role in supplying international liquidity and possibly issue securities denominated in SDR, it would be desirable to add to the basket an asset that could confer stability to its value. An alternative, which would not exclude the previous, would be to give IMF members the option to take loans denominated in gold or in SDRs (or a combination of the two).

References on request

Notes

1 Nasser Saidi is Chief Economist of the Dubai International Financial Centre Authority and Fabio Scacciavillani is Chief Economist, Oman Investment Fund. We would like to thank Aathira Prasad for invaluable research assistance.

2 See IMF, Money Matters: An IMF Exhibit -- The Importance of Global Cooperation, System in Crisis (1959-1971).

3 See Robert Triffin, 1960, “Gold and the Dollar Crisis: The Future of Convertibility," New Haven: Yale University Press.

4 Actually this point has not been uncontroversial. Kindleberger in his works on the Great depression effect, concluded that hegemony is conducive to systemic stability, as a hegemonic power would be able to internalize the externalities of a global public good, such as an international currency. However, Kindleberger's analysis was suitable for a situation in which an economy is dominant. With the emergence of several great economic powers is very much in question today. Also it has been pointed out that central bank reserves since 1999 have increased also in euro yen and Swiss Franc, but that none of these economies had a current account deficit. The apparent contradictions can be explained by the fact that the financial sector in these countries issued liabilities in their domestic currencies and invested in dollar denominated assets.

5 See for example Bergsten (2009), the report by the UN Commission presided by Joseph Stiglitz (summarized in Stiglitz (2009)), advocating an expanded SDR. 6 See the remarks by IMF Managing Director Strauss Khan in Strauss-Kahn (2010) suggesting that the IMF could issue SDRs as an international currency and Mateos y Lagos et al. (2009) who ask whether the size and volatility of today’s international capital markets are compatible with the supply of liquidity by a single country.

7 Cai et al (2005) find, using high frequency data that the gold price is most influenced by unexpected news which affect the oil price.

8 Lawrence (2003) asserts that “There is no statistically significant correlation between returns on gold and changes in macroeconomic variables, such as GDP, inflation and interest rates”.

9 Shaun K. Roache and Marco Rossi, The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity? IMF, WP/09/140, July 2009.

10 Central banks would greatly enhance transparency if they provide data on their physical gold holdings, separated from gold receivables, i.e. the gold linked assets they might have acquired or the gold they might have lent to the private sector.

11 Further information on the SDR can

In a nutshell, gold represents for many investors and a large portion of the general public an alternative to fiat currencies as a store of value. Anything that saps confidence in paper currencies, from fiscal expansions to security threats tend to be gold bullish.

So gold can assume a role -- not as central as during the gold

The Role of Gold in the New International Financial Architecture Moving to a ‘Hard SDR’ • 19

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fsrforum • volume 13 • issue#4

Placing the 2006/08 Commodity Price Boom into Perspective John Baffes & Tassos Haniotis

22 • Placing the 2006/08 Commodity Price Boom into Perspective

1. Introduction The 2006-08 commodity boom was one of the longest and broadest of the post-WWII period. The boom—and especially the 2008 rally, when crude oil prices peaked at US$ 133/ barrel (up 94 percent from a year earlier) and rice prices doubled within just five months—has renewed interest in the longterm behavior and determinants of commodity prices, and raised questions about whether commodity prices have reversed the downward course that most of them followed during most of the past century. It has also produced numerous calls for coordinated policy actions at the national and international level to address food availability and food security concerns.

To put the recent commodity boom into perspective calls for a good understanding of the key characteristics and determinants of long-term commodity price movements—and an appreciation of how limited this understanding is, especially with respect to the conditions under which the recent boom unfolded. Such a perspective is important in order to avoid policy pitfalls that in the name of mitigating food security concerns or improving the functioning of the markets may, in fact, exacerbate existing problems.

This paper has two objectives. The first is to analyze the nature of the recent boom, especially in food commodities, by examining which key factors fueled it and whether such factors are likely to remain in place in the long term. The second objective is to place the boom into perspective by examining long-term trends and characteristics of commodity prices. The next section begins with a discussion of recent price trends, including the causes of the boom as well as a comparison with earlier episodes of high prices. Particular attention is paid to three key (real or perceived) causes of the boom: excess liquidity and speculation, food demand growth by emerging economies, and use of some food commodities to produce biofuels. Section 3 analyzes the long-term behavior of commodity prices, including stationarity, co-movement among prices of food commodities, and the price link between energy and non-energy commodities. The final section summarizes and discusses some policy issues, including the rationality and viability of proposals for dealing with price spikes.

We conclude that a stronger link between energy and nonenergy commodity prices is likely to have been the dominant influence on developments in commodity, and especially food, markets. Demand by developing countries is unlikely to have put additional pressure on the prices of food commodities, although it may have created such pressure indirectly through energy prices. We also conclude that the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by investment funds may have been partly responsible for the 2007/08 spike.

Finally, econometric analysis of the long-term evolution of commodity prices supports the thesis that price variability overwhelms price trends.

2. The Nature and Causes of the Recent Commodity Boom The recent commodity boom emerged in the mid-2000s after nearly three decades of low and declining commodity prices

(Figure 1). The long-term decline in real prices had been especially marked in food and agriculture. Between 1975-76 and 2000-01, world food prices declined by 53 percent in real US-dollar terms. Such price declines raised concerns, especially with regard to the welfare of poor agricultural producers. In fact, one of the Doha Round’s chief motives (and also one of its perceived main obstacles) was the reduction of agricultural support and trade barriers in high-income countries— a set of reforms that was expected to induce increases in commodity prices and hence improve the welfare of lowincome commodity producers (Aksoy and Beghin 2005).

Starting in the mid-2000s, however, most commodity prices reversed their downward course, eventually leading to an unprecedented commodity price boom.

Between 2003 and 2008, nominal prices of energy and metals increased by 230 percent, those of food and precious metals doubled, and those of fertilizers increased fourfold. The boom reached its zenith in July 2008, when crude oil prices averaged US$ 133/barrel, up 94 percent from a year earlier.

Rice prices doubled within just five months of 2008, from US$ 375/ton in January to $757/ton in June. The recent boom shares two similarities with the two earlier major commodity booms of the post-WWII period, during the Korean War and the early 1970s energy crisis (see Radetzki (2006) for a discussion of the three booms). Each of the three booms took place against a backdrop of high and sustained economic growth as well as an expansionary macroeconomic environment, and each was followed by a severe slowdown of economic activity. And all three triggered discussions on coordinated policy actions to address food and energy security concerns.

Yet the recent boom also shows some important differences from the previous ones. By most accounts, it was the longestlasting and the broadest in the numbers of commodities involved. It was the only one that simultaneously involved all three main commodity groups—energy, metals, and agriculture—with its peak showing food and agriculture prices increasing less than all other commodity prices (World Bank 2009). It was not associated with high inflation, unlike the boom of the 1970s (although the increase in food prices had some notable, albeit short-lived, impact on inflation). Finally, it unfolded simultaneously with the development of two other booms—in real estate and in equity markets whose end led most developed countries to their most severe post-WWII recession.

The recent boom took place in a period when most countries, especially developing ones, sustained strong economic growth. During 2003-07, growth in developing countries averaged 6.9 percent, the highest five-year average in recent history (Figure 2). Yet apart from broad and prolonged economic growth, the causes of the recent boom were numerous, including macro and long-term as well as sector-specific and short-term factors.

Fiscal expansion in many countries and lax monetary policy created an environment that favored high commodity prices.3 The depreciation of the US dollar—the currency of choice for most international commodity transactions— strengthened demand (and limited supply) from non-US$ commodity consumers (and producers). Other important contributing factors include low past investment, especially in extractive commodities; investment fund activity by financial

»

Placing the 2006/08 Commodity Price Boom into Perspective • 23

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institutions that chose to include commodities in their portfolios; and geopolitical concerns, especially in energy markets.

In the case of agricultural commodities, prices were affected by the combination of adverse weather conditions and the diversion of some food commodities to the production of biofuels (notably maize in the US and edible oils in Europe).

That led to global stock-to-use ratios of several agricultural commodities down to levels not seen since the early 1970s, further accelerating the price increases. Policy responses including export bans and prohibitive taxes that were introduced in 2008 to offset the impact of increasing world food prices contributed to creating the conditions for the “perfect storm.”

The weakening and/or reversal of these factors, coupled with the financial crisis that erupted in September 2008 and the subsequent global economic down-turn, induced sharp price declines across most commodity sectors. But though commodity prices have declined sharply since their mid-2008 peak, they picked up again recently and the key commodity price indices are still twice as high as their early 2000s levels.

Thus the key question is whether at least some of the factors behind the recent boom are more permanent in nature, and likely to remain in place. Past experience reveals that food commodity price spikes were mainly driven by negative supply shocks, with high prices often acting as the best incentive for mitigating the shocks that generated them. Yet the pertinence of such experience for future developments has been questioned, and in attempts to explain the current boom, some factors have received considerably more attention (or even subjected to a considerable amount of misinformation) than others. With this in mind, the rest of this section examines the contributions made by three such factors, namely, excess liquidity and speculation, income growth and dietary changes in emerging economies, and the diversion of some food commodities to biofuel production.

Biofuels The increasing interaction between the price movements of energy and non-energy commodities during the boom focused attention on the impact of growing demand for biofuels, including for maize-based ethanol (mainly in the US) and oilseed-based biodiesel production (mainly in Europe).

During the boom, maize and crude oil prices moved in tandem, pointing to an emerging new and fixed relationship between them. Obviously, maize and its use for ethanol moved into the picture as significant factors affecting price developments. But how much impact was there, and was there a similar one in oilseeds, resulting from their use for biodiesel?

The contribution of biofuels to the recent price boom, and especially the price spike of 2007/08, has been hotly debated.

Mitchell (2009) argued that biofuel production from grains and oilseeds in the US and the EU was the most important factor behind the food price increase between 2002 and 2008, accounting, perhaps, for as much as two thirds of the price increase. Gilbert (2010), on the other hand, found little direct evidence that demand for grains and oilseeds as biofuel feeds tocks was a cause of the price spike.

FAO (2008) compared a baseline scenario, which assumes

24 • Placing the 2006/08 Commodity Price Boom into Perspective

that biofuel production will double by 2018, to an assumption that biofuel production will remain at its 2007 levels; it concluded that in the latter case grain prices would be 12 percent lower, wheat prices 7 percent lower, and vegetable oil prices 15 percent lower than in the baseline scenario. OECD (2008) arrived at similar conclusions for vegetable oils, finding that their prices would be 16 percent lower than the baseline if biofuel support policies were abolished; eliminating biofuel subsidies would have smaller impacts on the prices of coarse grains (7 percent) and wheat (5 percent). Rosegrant (2008), who simulated market developments between 2000 and 2007 (excluding the surge in biofuel production), concluded that biofuel growth accounted for 30 percent of the food price increases seen in that period, with the contribution varying from 39 percent for maize to 21 percent for rice. Looking ahead, Rosegrant found that if biofuel production were to remain at its 2007 levels, rather than reaching its mandated level, maize prices would be lower by 14 percent in 2015 and by 6 percent in 2020.10 Banse and others (2008) compared the impact of the EU’s current mandate to (i) a no-mandate scenario and (ii) a mandate whereby the US, Japan, Brazil also adopt targets for biofuel consumption. They estimate that by 2020, in the baseline scenario (no mandate), cereal and oilseed prices will have decreased by 12 and 7 percent, respectively. In the EU-only scenario, the comparable changes are 7 percent for cereal and +2 percent for oilseeds. By contrast, under the “global” scenario (adding biofuel targets in US, Japan, and Brazil) oilseed prices will have risen by 19 percent and cereal prices by about 5 percent. The European Commission’s own assessment of the long-term (2020) impacts of the 10 percent target for biofuels (i.e. that renewable energy for transport, including biofuels, will supply 10 percent of all EU fuel consumption by 2020) predicts fairly minor impacts from ethanol production, which would raise cereals prices 3-6 percent by 2020, but larger impacts from biodiesel production on oilseed prices; the greatest projected impact is on sunflower (+15 percent), whose global production potential is quite limited.

Taheripour and others (2008) simulate the biofuel economy during 2001-06. By isolating the economic impact of biofuel drivers (such as the crude oil price and the US and EU biofuel subsidies) from other factors at a global scale, they estimate the impact of these factors on coarse grain prices in the US, EU, and Brazil at 14 percent, 16 percent, and 9.6 percent, respectively. A joint US Department of Agriculture and Department of Energy assessment (USDA/USDE 2008) concluded that the recent increase in maize and soybean prices appears to have little to do with the run-up in prices of wheat and rice. It found that if the amounts of corn used for ethanol and edible oil used for biodiesel in the US had remained unchanged at their 2005/06 levels, prices in 2007/2008 would have been 15 percent lower for maize, 18 percent for soybean, and 13 percent for soybean oil. The assessment also concluded that the impact of biofuels production in 2007 was a 3-4 percent increase in retail food prices and a 0.1-0.15 percent increase in the all-food CPI. Clearly US maize-based ethanol production, and (to a lesser extent) EU biodiesel production) affected the corresponding market balances and land use in both US maize and EU oilseeds.

Yet, worldwide, biofuels account for only about 1.5 percent of

the area under grains/oilseeds (Table 3). This raises serious doubts about claims that biofuels account for a big shift in global demand. Even though widespread perceptions about such a shift played a big role during the recent commodity price boom, it is striking that maize prices hardly moved during the first period of increase in US ethanol production, and oilseed prices dropped when the EU increased impressively its use of biodiesel. On the other hand, prices spiked while ethanol use was slowing down in the US and biodiesel use was stabilizing in the EU. Yet while the debate has focused mostly on the amount of food crops that have been diverted to the production of biofuels, and the resulting effect on prices, less attention has been paid to a more important issue linked to this development the level at which energy prices provide a floor to agricultural prices. Analytically, this is a very complex issue; in addition to the prices of the respective commodities (energy and feedstock for biofuels), it involves numerous other elements, including subsidies, mandates, trade restrictions, and sunk costs of the biofuel industry.

Therefore, analysts often use various rules of thumb to express perceived new relationship between agricultural and crude oil prices. One such rule is that the price of maize expressed in US$/ton is roughly double the price of crude oil in US$/barrel (thus a US$ 75/barrel price for

Effect of biofuels on food prices has not been as large as originally thought. crude oil would correspond to US$ 150/ton for maize). Other commentators (in the US) have argued that a price of US$ 3/gallon of gasoline at the pump is the level at which the maize price is determined by the crude oil price. The World Bank (2009) reported that crude oil prices above US$ 50/barrel effectively dictate maize prices; this conclusion was based on the strong correlation between the maize price and crude oil prices above US$ 50/barrel and the absence of correlation below that level.

The US Government Accountability Office (2009: 101) while acknowledging that economists have disagreed about the circumstances that would make the 2009 US biofuel mandates nonbinding (i.e. biofuels become profitable at current energy prices), it gave a range between $80 and $120 per barrel (the range was based on anecdotal evidence based on interviews). The empirical basis of such rules is linked to the issue discussed in the next section.

3. Commodity Prices: Longer�term Trends This section focuses on three key characteristics of commodity price behavior: lack of trends, co-movement among prices, and a special case of the latter, i.e., the link between energy and non-energy commodity prices.

Trends, cycles, and everything in between The long-term behavior of commodity prices was first examined systematically by Prebisch

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(1950) and Singer (1950), who noted that since the late 19th century the prices of primary commodities had been declining relative to the prices of manufactured goods (often referred to as the barter terms of trade). They warned of potential problems for producers of primary commodities, and in fact the notion of declining terms of trade formed the cornerstone of the industrialization policies that many developing countries pursued during the 1960s and 1970s.

The so-called Prebisch-Singer (PSH) hypothesis has been, perhaps, one of the most researched topics in commodity price behavior. Early research (e.g., Spraos 1980; Sapsford 1985; Grilli and Yang 1988), which focused mainly on identifying trends, supplied broad support for PSH. However, later authors found that prices did not simply move along a linear trend but instead contained strong stochastic elements, i.e., long and irregular cycles, thus producing more mixed results (e.g., Cuddington and Urzua 1989; Cuddington 1992).

Studies using better econometric techniques and longer time series allowed for structural breaks (e.g., Leon and Soto 1997; Zanias 2005; Kellard and Wohar 2006). And very recent literature, focusing on non-linear or time-varying alternatives (e.g., Balagtas and Holt 2009), finds even less support for PSH. All this research is perhaps best summarized by Cashin and McDermott (2002) who concluded that the downward trend in real commodity prices is of little policy relevance because it is small when compared to the variability of prices. Or as Deaton (1999: 27) succinctly put it, “what commodity prices lack in trend, they make up for in variance.”

Commodity price variability is at the core of the current policy debate. The difficulty associated with describing past price behavior, and hence with making inferences regarding future trends, can be inferred from Figure 1; the conclusions reached depend on what time period is chosen for analysis.

Statistically, this difficulty reflects the problem of non-stationarity, i.e. the fact that the average price does not exist in the statistical sense. Table 4 shows the results of an analysis of stationarity for prices of six food commodities (wheat, maize, rice, soybeans, soybean oil, and palm oil). For sensitivity purposes, we report results from two tests, with and without trend, both in nominal and real terms (we also used US CPI in addition to MUV and the results were remarkably

26 • Placing the 2006/08 Commodity Price Boom into Perspective

similar). All lend strong support to non-stationarity, thus reaffirming the conclusions reached by Cashin and McDermott (2002) and Deaton (1999).

What commodity prices lack in trend, they make up for in variance.

The fact that commodity price variability overwhelms trends has a number of key implications. On the methodological side, analysis involving prices needs to recognize that cor­ relations may not be meaningful unless certain conditions are met (see next section), and also that because a mean or a trend of the price series cannot be properly defined, the variability in prices is difficult to calculate. On the policy side, attempts to introduce mechanisms with price triggers (as has often been proposed recently) are likely to fail. In fact, the absence of trends (or simply put, the non-existence of an “average price”) may be the key reason why earlier price stabilization (or other) mechanisms failed.11 When prices stay low for long periods, stabilization funds run out of resources, and when prices stay high for long periods, stabilization funds tend to be misused. Consider, for example, that the agricultural commodity price index (shown in Figure 1) exceeded its period average (equal to 173) in all years during 1948-71 and fell below it in all years during 1981-2007.

Co­movement Because some agricultural commodities can be substituted for one another (e.g. various edible oils), while resources on the input side (e.g., land, labor, and machinery) can be shifted from one crop to another, the changes in fundamentals or policy actions in one market will eventually be transmitted to other markets as well. Thus, assessing how the prices of various food commodities move with respect to each other is paramount in understanding the way and the degree to which market conditions and policies affect prices.

Examining such relationships ultimately comes down to estimating the degree of price co-movement among various commodities.

While the general subject of price co-movement has been extensively studied in the literature, analysis of the co-movement among prices of different commodities is scarce. (For a brief literature review of price co-movement and the reasons why the issue has not been adequately researched see the Appendix B.) Here we analyze the co-movement of prices using a simple econometric model. The degree of co-movement was analyzed among six food commodity prices, using ordinary least squares with annual data from 1960 to 2008: Pti = μ + β1Pt j + β2MUVt + β3t + εt, where Pti and Pt j denote the logarithm of commodity price i and j in year t (expressed in nominal dollar terms), MUVt denotes the deflator, t is the time trend, and εt denotes the error term; μ, β1, β2, and β3 are parameters to be estimated. The results are reported in Table 5. Because prices are non-stationary (see previous section) examining the stationary properties of the error term is a crucial step in establishing the validity of the model. All the regressions show strong performance, with an average R2 of 0.84 and with unit root statistics that strongly confirm the stationary of the error term. Moreover, in all cases the slope estimate of the price variable is significant at the 1 percent level.

The results imply that it is important not to analyze commodity markets in isolation from one another, because the impact of events that seemingly affect one market will eventually be equalized among most commodity sectors. Consider, for example, the palm oil/soybean oil parameter estimate of 0.97 and an R2 of 0.93 (Table 5, bottom row). This suggests an almost synchronous movement of palm and soybean oil prices, despite the fact that soybean oil is an annual crop produced chiefly in North and South America and palm oil is a tree crop produced almost exclusively in East Asia. The implication is that, whether biofuel mandates are applied to one or the other edible oil market, the effect will be eventually diffused among all edible oil markets. Not surprisingly, policies favoring biofuel production in the name of environmental benefits may in fact lead to less desirable outcomes. That is, the environmental benefits from switching from fossil fuel use to, say, rapeseed-based biodiesel in Europe or soybean oilbased biodiesel in the US may be less than the environmental costs of expanding palm oil production in East Asia. Similarly, prices of wheat, maize, and soybeans—key food crops, produced primarily in the US, EU, and South America— show an equally large co-movement, as their R2 averaged 0.93, much like that of palm and soybean oil. For inflation, by contrast, the estimated coefficient is either not significantly different from zero or, in the few cases where it is significant, it is small. And the time trend parameter estimate is almost always zero—implying that there is either no trend or the same trend for all prices.

4. Concluding Remarks Numerous factors have contributed to the recent commodity boom, and have been analyzed extensively in the literature. Yet their relative weight continues to be an area of contention. In this paper we examined three key factors whose role has been somewhat controversial: speculation, the growth of demand for food commodities by emerging economies and the role of biofuels. We conjecture that index fund activity (one type of “speculative” activity among the many that the literature refers to) played a key role during the 2008 price spike. Biofuels played some role too, but much less than initially thought. And we find no evidence that alleged stronger demand by emerging economies had any effect on world prices. Although tentative, these conclusions provide insights into the determinants of the future path of commodity prices, which is still uncertain.

Our conclusion about the long-term evolution of commodity prices is consistent with earlier literature, and supports the thesis that price variability overwhelms price trends. Variability is such that the average price does not exist in the statistical sense (i.e., prices exhibit non-­ stationary behavior), and the conclusions reached about trends depend on what time period is chosen for the analysis. Despite its simplicity, this conclusion has important implications. Following the recent food price spike, there have been calls for policy actions, essentially aiming to alleviate the impacts of price spikes on developing countries, through reliance on some level of buffer stocks (whether physical or virtual). History has not been kind to collective measures designed to prevent the decline or reduce the variability of prices. What type of measures would be more pertinent to mitigate any undesired effects of price variability would depend on the better understanding of the factors that not only affect, but also potentially alter, long-term price trends.

References on request Earlier versions of this paper have been published in the World Bank Working paper series and in a book edited by Ataman Aksoy and Bernard Hoekman.

Placing the 2006/08 Commodity Price Boom into Perspective • 27

A N d e r h A l f U U r v o o r d e e i N d b e s p r e k i N G vA N d e j A A r r e k e N i N G vA N e e N G r o ot r e c l A m e b U r e A U

W W W.G A A A N . N U

Š 2011 KPMG N.V., alle rechten voorbehouden.

fsrforum • volume 13 • issue #4

Interview Willem Middelkoop

By Bart Lips & Luc Gerretsen (May 12, 2011)

Why are commodities stable in value?

Commodities are stable in value because you simply cannot ‘print’ more of it. This condition holds for all commodities alike. If you want to understand the world of commodities, you first need to understand the financial system. Getting acquainted with the latter has been my quest for the last 14 years. Once you start getting a good grasp of things, sooner or later you are bound to discover the Holy Grail: in fact, you realize that it is one gigantic ponzi-scheme. Paper money is being created, but it is not backed by hard assets or real assets. Say you are a banker and decide to lend money to someone; if you tell that person that she can always barter this paper money for bricks, she can try to estimate the value of these bricks. Money, however, is covered by nothing. Banks are money-creating institutions in an unsecured monetary system.

If they keep on printing more of that paper (i.e. creating money) long enough, the value of hard assets start to rise gradually in comparison to money. This has been our reality for the last 300 years, and the tempo has increased dramatically over the last 30 years.

I pointed out the ability of banks and governments to infinitely create money; commodities on the other hand cannot be simply created out of thin air. Since these resources lie in the ground, it is only logical that their value increases over time, notwithstanding a number of corrections brought by disturbances in the world economy.

Therefore, if money can be created at wish and commodities are physically limited, one can legitimately assume that commodities will ultimately increase in value.

Moreover, commodities benefit from a few other tailwinds. Every year sees more money added to the system and more resources being consumed. Commodities become thus scarcer compared to money. So at the end of the year we have more money, but less commodities. Their ever-faster growth in value is then printed in money.

Add to that an accelerating increase of the world population, along with more purchasing power, and you can see why more and more commodities will be needed.

Middelkoop attended the Polytechnic School of Amsterdam, where he followed a specialization in the clothing industry. He worked as a photojournalist in the years 1980 to 2000 and started publishing articles related to the economy and financial markets in the early nineties. Since then, he has been actively investigating the alleged secrets of the financial system, and his unorthodox views on the subject have made him a familiar figure in the media. He is blatantly pessimistic about the dollar and is ultimately skeptical of financial institutions. Middelkoop has been bullish on physical gold for years now and has showed a similar gusto for oil and other commodities. This triggered him to found the Gold & Discovery Fund, which focuses on Canadian exploration firms.

In his book ‘When The Dollar Falls’, which came out in September 2007, Middelkoop warned of a global-scale crash of the financial system. In June 2008 he published another book entitled ‘The Permanent Oil Crisis’ in which he predicted the sudden peak in the global oil production, the permanent high oil prices and, consequently, the major implications this would have for our western way of life. In 2009 a third book came out of the press with the rather bleak title ‘Survive The Credit Crisis’. In total, he has sold over a 100,000 books.

30 • Interview Willem Middelkoop

The dollar is not

'as good as gold' anymore

In one of your columns you cited ‘the old J.P. Morgan’ and referred to a remark from 1907. ‘It is the currency that is accepted worldwide as a carrier of value; it is always tradable and does not require a financial ­obligation from anyone else. These characteristics make gold an impartial standard’. Why is gold this impartial standard? Why not another precious metal?

That is a very good question, because there is no logical explanation to it. Gold is softer than many other metals, and it is a relatively bad conductor (although it does not oxidize). But in fact, if you look at the whole periodic table in a pragmatic way, you would end up with gold. At the end of the table you come across, say, uranium. It weighs as much as gold, and heavy metals feel great to have. Gold is 40% heavier than lead for example. Tungsten, or wolfram, shares a weight comparable to gold and uranium. The former is found in abundance however, which makes it less scarce. Such affluence does not exist for uranium, which is a very scarce resource; but it is also extremely radio-active, and people usually prefer not to carry this in their wallets. Those two metals get thus erased from the picture, remains gold. Over the course of thousands of years, common sense opted for this sun-like shiny metal. You wanted to go for a material which did not rot or rust. All metals corrode except for gold, and silver to a lesser extent. Besides, gold is scarce; people find it beautiful, and its softness makes it easily divisible under relatively low temperatures and can be subsequently reassembled. Such divisibility makes diamonds an unviable alternative. Ultimately, gold becomes -through all these conditions imposed by the uses of money- the best option for an impartial standard. The gold standard has naturally come to surpass the rest.

How much does the dollar affect the price of various commodities (a number of them are in fact dollardenominated and, therefore, you can see that Euro/ Dollar exchange rates for instance show a particular correlation with commodity prices).

This is very important. If we go back to 1944, we can see where it all went wrong. America gained power as it was about to win the war. Heretofore, America used to be very much self-centered. A few bonds were made following the 1929 crash, when it realized it needed the outsiders to become stronger. It designed a plan which would allow it to become an important player on the international scene, and in order to achieve this it used the Second World War In 1944, it held a famous conference in Bretton Woods, to which all finance ministers were con-

vened. Americans used the conference to present a new monetary system that would replace gold with the dollar as its main currency. This was obviously very clever, since from that point on all commodities would have to be traded in dollars, and Americans were the only ones allowed to print the greenback.

France was not particularly happy about this, along with other European countries. The U.S. would, as a consequence, become the powerful player it had envisioned. In exchange, it had had to promise that the dollar would remain ‘as good as gold’.

Under this condition, all the ministers accepted the deal.

Another proposal had come from John Maynard Keynes to create Bancor, a supranational currency, but it had failed. The new convention gave America the lead on global markets. The value of the dollar was therefore essential for anyone dealing with commodities. The first dollar crisis hit, and everything went wrong. In the late 1960s, the U.S. resorted to the printing press to finance the Vietnam War. This and a newly designed system for pensions and social security put enormous pressure on the dollar. There were simply too many circulating. The Netherlands and other countries held the U.S. to its promise and sent dollars in exchange for gold. Fort Knox threatened to run out of reserves, and in the summer of 1971, President Nixon decided to break the agreement unilaterally. The dollar was not ‘as good as gold’ anymore, and it became an unsecured bill. From that moment on, an increased sense of uncertainty has beleaguered the currency, and the latter has since then struggled for its survival as the world standard.

Countries like Russia, India and China now start to realize how much of a competitive advantage this strategy has rewarded its initiator. As a consequence, they feel much more inclined to adopt the SDR (Special Drawing Rights) as a standard for the trading of raw materials. This is a combination of multiple currencies. The SDR is trying harder and harder to impose itself as the new world currency; such development would eventually belittle the dollar’s influence on the price of commodities.

Oil prices have been likened to an intense rollercoasterride over the past few weeks. First a sharp increase in response to the Arab Spring, and now a significant correction following the death of Osama Bin Laden. The surprising thing is how the death of one terrorist leader (which is accompanied by fear of reprisals) causes such a downfall in prices, while the crisis in other countries such as Libya and Yemen perdures. Why does the oil price fluctuate so much and where does it go?

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It varies so much because there are so many speculators on the market. The most speculative market is the dollar market at the moment. If the dollar goes down, it sweeps a large number of speculators with it, and this is why the dollars falls so sharply. Then, when it is undervalued, everyone turns around to buy dollars again, which in the short term makes it very attractive. The dollar is closely linked to the oil price.

Add to that the tabloids about the Middle-East, which reinforces the possibility for speculators, and you get a very volatile oil price. The latter will eventually rise as oil is a commodity, and we agreed earlier to say that commodities were scarce.

Silver has declined substantially in recent times, anticipating a sudden explosion in prices. Which forces are at play in this market? Why? Is it a consequence of price-manipulations undertaken by J.P. Morgan for years and which you have been describing at length on websites such as iex.nl?

Silver is, in fact, the younger volatile brother of gold. Silver rises and falls in line with gold, only somewhat later, and the movements are more extreme. This can be accounted for by the relatively smaller size of the silver market. Silver is also cheaper, which explains its nickname of ‘poor man’s gold’.

There is a gold/silver ratio, because nature provides approx.

10 times as much silver as it does offer gold. Knowing this you can reasonably infer that the price of silver should be approx. one tenth of the gold price. There were times where gold was worth as much as 70 times the same quantity of silver; such inequality was to be corrected sooner or later.

Now, one can see that there is a similarly high demand for silver as there is for gold. So the expected 1 to 10 ratio could also just be 1 to 5. I think gold will go as high as $10,000.

Because of the similar demand, I also expect silver to eventually reach the $200 level.

According to you, a process of backwardation took place on the silver market. A phenomenon where there is a higher price for immediate delivery than for forward contract, irrespective of the costs associated with holding the physical silver, costs from the loss of interest payments and costs for the storage and insurance. Do such phenomena occur in light of anomalies in the regulations? Faults that permit an abundance of futures contracts in the face of a shortage of physical silver?

32 • Interview Willem Middelkoop

It depends on several factors: now it is very difficult to a physical delivery from a Comex future (the market for silver). They try to discourage you, or suggest a cash settlement, because there are too many contracts available compared to the actual physical availability of silver on the markets. Futures markets were instituted as a means for merchants to hedge the risk involved in their trades. America has quickly learned that if you have large futures markets, it becomes a sort of paper casino in which you can engage in an unlimited number of transactions, provided that you possess enough –unsecuredmoney. It is much easier to manipulate futures markets than their physical counterparts, because the latter always require you to deliver. On futures markets, 99% of the trades are speculative and do not involve any physical delivery whatsoever; of course, this is not what normal markets should aim for.

We have witnessed quite a few rounds of Quantitative Easing (QE), the last version of which will end this summer. Economic theory has it that the printing of money ultimately leads to inflation. A plethora of brand new bills have made their way to the market, which has prompted fear of hyper-inflation. How realistic is this scenario? Are the commodities ­exchanges and commodities-linked firms the only escape routes to protect capital?

If you think equity markets, commodity-funds are the most attractive safe havens for your money. If hyper-inflation is to happen, many types of bonds will be worthless. But shares of healthy companies can also be a good option, since the government cannot print any of it. So it depends on the way you look at it. The best-performing stockmarket in 2010 was, interestingly enough, the one from Zimbabwe. It went up 30,000%. Inflation that same year was 50.000% however. So with shares you would still have maintained a large part of your wealth, but as a saver you would be ruined. If you are a very prudent player with your wealth and always save it on the bank account, you ultimately end up losing a few percentages in purchasing power purely due to inflation. We call this negative interest rate.

The fact that defensive investors also came to acknowledge the fragility of their banks did not help. If you put your savings on a bank account, this money is not yours anymore -legally speaking- in contrast to bonds. In case of bankruptcy, bondholders receive precedence over the saving’s depositor. At the moment it is not very popular to leave a large part of your

Their 500 Billion Dollar plan indicates that China is working very hard to get away from paper assets.

wealth on the bank account: you would be better off investing it in commodities or real estate. As bizarre as it may sound, it would actually be safer now. China has been busy working on this, as their plan to buy 500 Billion worth of raw materials is being materialized. This strategy allows China to dump all its dollars without having to make us of currency markets. China is, in so doing, building a hedge against a potential decline in the dollar; albeit another 3000 Billion in reserve, of which the half is thought to be dollar-denominated. Besides, the fact that it is too big for currency markets means that it would basically shoot itself in the foot by trying to trying to sell their dollars there; so the Chinese have found in commodities a clever way to get rid of their paper dollar assets while acquiring quality hard assets. This is a great smart way to manage your capital, if you ask me.

China is the biggest producer of silver, but also the largest importer. Why is this the case?

I did a study on this very question. It is since 2007 that China can be considered a big silver importer while it is the largest producer, and production keeps growing.

Alan Greenspan said in 2009 that the increase in the price of raw materials constituted an indication of the first phase of migration from paper assets to hard ones. Following this was the 500 Billion plan from China to acquire great quantities of raw materials, clearly denoting the second phase. The country fears a melt-down of the U.S. currency and invests accordingly. The China Sovereign Wealth Fund opened its first office abroad. It is located in Torronto, the capital of Canada and, perhaps more importantly, the commodities capital of the world. This indicates that China is working very hard to get away from paper assets.

You are an appreciated guest on television programs such as RTL Z. Here you often share negative views of the financial system, while many students will get to work in firms that form the flesh of that vary system.

Yes, and it’s rather strange that they still invite me. I actually find it difficult to talk to students.

In fact, the message I have for today’s student is not a pleasant one. They study really hard for a number of years to end up working in a place which I think does not have a future. I tell stories about a financial system analogue to the Dutch firm Firma List & Bedrog, that it is a gigantic ponzi scheme and that it creates an unsustainable situation in which a total collapse is not impossible. I simply try to be as honest as I can whenever I speak. I interpret facts in my own way and I like to share it with people. If you do not want to hear it, you can always stop listening.

In that case, where should students go?

Should there be a new world order, a place without banks and where other companies do not hire anymore, there would still be governments. Young, smart, talented people are always welcome in government. So, by learning your way to a deep understanding of the financial system you can create good opportunities for yourself. Therefore, the question is whether it will be in the current financial system, or the new one. Either way, if you understand the system well you will see what can be improved. This knowledge can also help you while working at a big bank.

There, they are constantly busy performing risk management analyses with regards to the future. All in all, my advice would be to objectively deepen your awareness of the system and, subsequently, create your own opinion.

Interview Willem Middelkoop • 33

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fsrforum • volume 13 • issue #4

Should we fear investors in commodity markets?

Dr. Ronald Huisman

Commodity markets have become accessible to investors. If you wanted to invest in oil in the past, you had to buy barrels on the spot market, store it somewhere onshore or as cargo in an oil tanker, and then sell it when the price was right.

This involved time to find such a tanker or other storage facilities and negotiation to indeed obtain sufficient storage capacity for a reasonable price. An alternative was to buy stocks of a commodity company such as Shell in case of oil, but what was the stock to buy in case you were interested in cocoa or pork bellies, just two examples of commodities that are frequently traded in markets?

Financial markets offer many instruments with which one can invest in commodities. Think about options and futures contracts and more recently ETF's. In case of a futures contract, you basically buy a contract from which the commodity will be delivered on some date in the future at a pre-specified location. For instance, Rotterdam is a location used in many coal futures contracts. Investing with a futures contract is not a buy and hold strategy as such a contract terminates at some date. Here come ETF's into play. An ETF, an exchange trades fund, is like a share. For instance if you buy one oil ETF someone buys one barrel of oil for you and stores it until you want to sell. The price of the ETF therefore reflects the current price of oil minus storage costs and some fee for the issuer. This makes commodity investing easy. Just buy a cocoa ETF and you invest in cocoa like it would be if you could invest in a cocoa stock.

Since investing in commodities is that easy, the natural buyers and sellers of commodities are no longer only commodity traders. Now every investor has access to commodity markets and that brings different type of supply and demand to the commodities markets. Oil prices went to $144 a barrel in the Summer of 2008 and fell to $40 about a half year later and greedy investors were blamed for both the increase and decrease in the oil price. Investors fearing the stock markets these days buy gold as a safe investing thereby pushing the price of gold to high limits. For gold, we think that’s normal, but when the commodity is a basic human need such as oil, electricity and gas or a food product such as orange juice and coffee or inputs for goods such as wood and rubber, we typically think it's unwanted that investor demand for commodities can drive prices up. So, should we fear the investor in commodities markets?

An investment is a claim on expected future cash-flows.

These cash-flows consist of frequent payments coming from the investment, such as dividends, and the price obtained when the investor sells the investment or when the investment terminates. In case of investing in commodities, the frequent payments are negative as the investor has to pay storage costs. So, the cash-flow from selling the commodity is the major return driver. What do we know about commodity prices? About stocks, we know that stock prices can go anywhere in the long run; the sky is the limit. But this argument doesn't hold for commodities. Commodity prices are known to be mean-reverting in the long run. When gasoline price

We know that stock prices can go anywere in the long run; the sky is the limit. get's too high, people will shift there demand to cars that run on a different fuel than gasoline. This substitution effect will then lower the demand for oil and therefore lower the price of oil. Another price dampening effect is that a high oil price will bring additional supply to the market; supply that was not profitable at low prices. Therefore, investors will not lead to higher than normal oil prices in the long run. But in the short run, investors can push prices faster to their limits than in the case they would not be in the market. I therefore think that investors in the commodity market increases volatility in the short run, but dampens volatility in the long run.

Investor demand can push prices to higher limits in the short run, but can never push prices above the natural upper limit in the long run when substitutes products will enter the market.

Is this bad? Should we fear the investor in commodities as the higher volatility in the short run feels bad. But a high oil price triggers the demand for more economic cars and renewable energy. From that perspective, more demand from investors in oil only facilitates the transition to renewable energy. Perhaps not so bad after all.

Should we fear investors in commodity markets? • 35

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fsrforum • volume 13 • issue #4

Pindakaas

K(r)anttekening | Drs. Joost Groeneveld RA RV

“Museum Boijmans Van Beuningen heeft de befaamde Pindakaasvloer (1962) van Wim T. Schippers aangekocht. Deze vloer is een bijzondere installatie met een roemruchte geschiedenis. Het kunstwerk sluit aan bij andere conceptuele vloersculpturen in de museumcollectie” (persbericht van 13 januari 2011).

Als financieel-econoom ben ik natuurlijk benieuwd naar de prijs die Museum Boijmans van Beuningen voor dit befaamde kunstwerk heeft betaald. Die heb ik niet kunnen achterhalen.

Doordat ik niet goed heb gezocht? Of doordat ze die maar liever stil houden? Het laatste zou ik me wel kunnen voorstellen. Het moet een kostbaar werk zijn. Een potje pindakaas van 350 gram kost al gauw e 3,00. En in zo’n kunstwerk is dat ene potje helemaal niks. Je zult toch ten minste zo’n 10.000 potjes nodig hebben om iets te krijgen dat op een vloer lijkt. En voor zo’n kunstwerk moet de kwaliteit uitstekend zijn. Met stukjes noot of helemaal glad? Maar misschien krijg je wel kwantumkorting. Met als hoofdsponsor Calvé. En dan heb ik het nog niet over het onderhoud van het kunstwerk.

Bovendien zal de kunstenaar er ook iets aan willen verdienen.

Komt hij zelf de vloer leggen?

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators). Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

38 • Pindakaas

Wat zou de oude van Beuningen hierover zeggen? Doet deze roemruchte vloer eer aan zijn nagedachtenis? Is er niet een statuut voor de kunstverzameling waaraan Boijmans met zijn aankoopbeleid moet voldoen? Hoort dit kunstwerk niet veel meer thuis in het Eindhovense Van Abbe Museum waar eens Rudi Fuchs met slachtafval tamelijk letterlijk de directie­ scepter zwaaide? Inmiddels begrijp ik dat hij daarmee zijn tijd – en zeker mijn tijd - ver vooruit was. Ik vond het ronduit smerig. Hoe een mens zich kan vergissen. Misschien toch niet zo slecht dat die musea wegens verbouwing langdurig zijn gesloten. Wie herinnert zich niet het recente werk van Anselm Kiefer dat door het Amsterdamse Rijksmuseum is aangeschaft voor de Nachtwachtzaal. Zij hebben Kiefer de vrije hand gelaten. Vanzelfsprekend. “Vanaf 7 mei is het spectaculaire La berceuse (for Van Gogh) te zien in de Nachtwachtzaal in de Philipsvleugel”.

Toch is het met die vrije hand niet helemaal goed gegaan.

“Het werk van Kiefer, een van de succesvolste naoorlogse kunstenaars, bestaat uit drie grote glazen vitrines. Twee zijn gevuld met zonnebloemen, de middelste met het klapstoeltje dat zo vaak figureert op schilderijen van Van Gogh. Het heet La Berceuse (De wiegster), net als Van Goghs beoogde drieluik

uit 1888 …”. En dat terwijl het de bedoeling van directeur Wim Pijbes van het Rijksmuseum was om het beroemdste schilderij van Rembrandt van Rijn als uitgangspunt te nemen.

“Met kunst is het als met humor: als je het wil verpesten, moet je vooral gaan uitleggen” “Met kunst is het als met humor: als je het wil verpesten, moet je vooral gaan uitleggen” (Wim Kranendonk, NRC 6 mei 2011). Onbegrip als vrijbrief. En Kranendonk vervolgt: “… Het is te hopen dat men in Amsterdam de angst voor schampere commentaren snel overwint en zal durven zeggen waar het om gaat: een kunstwerk dat op uitdrukkelijk verzoek gemaakt werd als reactie op de Nachtwacht …”. Pijbes is een snelle leerling. Hij zegt „heel blij” te zijn met Kiefers werk. “Het monumentale van de Nachtwacht vind je erin terug.” Zou Rembrandt zich lekker voelen bij dit compliment?

Je kunt je natuurlijk afvragen of Kiefer wist voor welk Amsterdams museum hij iets zou maken. En als financieeleconoom zou ik willen weten wat het Rijksmuseum hiervoor heeft betaald. Maar financiële transparantie is blijkbaar niet het sterkste punt in de kunstwereld. Ik benijd Pijbes niet altijd. Al eerder moest hij de aanschaf van het pistool van de moordenaar van Pim Fortuyn recht praten. Maar dat zou het museum niks gaan kosten. Dat wordt later vast een heel beroemd pistool. En je kunt het dan maar beter al vast hebben.

Op 26 april 2011 schreef Francine van der Wiel in NRC Handelsblad “Over dans”. En zij stelt vast dat de stromingen “dwars door elkaar heen lopen”. Bij dans lijkt me dat storend.

Maar, zo schrijft zij: “Voor de individuele voorstelling is dat geen probleem. Integendeel zelfs. Mengvormen leveren vaak de fraaiste resultaten op. Maar bij de dansfestivals tekent zich een probleem af”. En zij schrijft met betrekking tot Springdance over “de prilste, zelfs onrijpe moderne en conceptuele

(anti-)dans”. Op de foto bij haar artikel het dansstuk “Un peu de tendresse bordel de merde” (Dave St. Pierre). Waarover iemand anders schrijft: “De performance is één ontlading van opgekropte frustraties. Instinctieve, schokkende, stampende bewegingen zijn het verscheurende resultaat van een wanhopige drang naar affectie. Ziel en lichaam worden in hun blootje gezet in deze voorstelling zonder gêne waarin podium en zaal versmelten tot één fysieke ruimte. Op de koop toe wordt je tolerantie tegenover obsceen en irritant gedrag op de proef gesteld. Provocatie, of een roep naar romantiek?”

Het is niet zo moeilijk om in de kunstsector voorbeelden te vinden op grond waarvan bezuinigen niet alleen mogelijk zijn, maar eigenlijk ook wel heel wenselijk. Probleem is natuurlijk dat iedereen zo zijn eigen voorbeelden heeft. En dat we ieder op onze beurt ons ergeren over de verkeerde bezuinigingen, waarvan we er ook wel een aantal kunnen noemen. Kortom: de omgekeerde vraag is interessanter en uitdagender: op welke kunst moet niet worden bezuinigd?

Politiek heeft altijd wel een antwoord: marktwerking. Als er genoeg mensen naar museum, schouwburg en concertzaal gaan, is er geen probleem. Het aloude “theater van de lach” zou zich vermoedelijk wel redden. En waarom moeten we al die experimentele groepjes en groepen in leven houden als er geen markt voor is? Waarom doen we dat eigenlijk? Om te voorkomen dat “Nederland een stuk zal zakken in de internationale top”? (Els Swaab, voorzitter van de Raad voor Cultuur, NRC 30 april 2011). “Het gaat om verschraling van het culturele aanbod. De toegangsprijzen zullen fors omhoog gaan met als gevolg dat minder mensen naar voorstellingen en tentoonstellingen gaan” (Kunstredactie NRC). En het gaat om werkgelegenheid: “enkele duizenden werknemers en ten minste zoveel zzp’ers”. Maar sinds jaar en dag – namelijk sinds het Rijn-Schelde-Verolme debacle in 1983 - is dat laatste geen argument.

Kortom: de omgekeerde vraag is interessanter en uitdagender: op welke kunst moet niet worden bezuinigd?

Onze banken zijn niet door de overheid gered en vervolgens gerestaureerd vanwege werkgelegenheid maar omdat het systeembanken zijn. De kunstsector zou naar analogie een systeemsector zijn: onaantastbaar; in feite heilig verklaard. “Dit advies (JG: van de Raad voor Cultuur) is desastreus voor de kwaliteit en onafhankelijkheid van de sector” (Erica van Eeghen, NRC 4 mei 2011). Grappig om in dit verband over onafhankelijkheid te spreken. Dus zolang de overheid de sector subsidieert, is de sector onafhankelijk. En dat het allemaal heel erg is, illustreert van Eeghen als volgt: “Dan moeten acteurs uit het ensemble jeugdvoorstellingen spelen waar ze helemaal geen zin in hebben”. Eerlijk, ik wist niet dat het zó erg zou zijn. Je zult het maar moeten doen: iets waar je helemaal geen zin in hebt. Helaas, pindakaas.

Pindakaas • 39

Mazars is ontstaan uit een fusie tussen Mazars en Paardekooper&Hoffman

⎥⎦ W.w e∼k Ψnb ijmΕ zar s.⇔←

Ga verder met Mazars.

fsrforum • volume 13 • issue #4

Word of the chairman

Luc Gerretsen

Dear members, The construction work at the Erasmus University has started. After thirty years the C-Hall will be renovated and great parts of campus are closed by fences. We will all have to adapt to the situation on campus the coming years and will hopefully be rewarded with the beautiful campus that will give the EUR the professional appearance this top university deserves. The University is updating itself so that it can facilitate the ever growing student population.

At the FSR we also see that we have an increasing number of members every year. We foresee that the upward trend will be even steeper in the coming years as we not only grow by the enrollment of students but also in the coverage at several faculties. At the Erasmus School of Economics we have always had a strong position, since almost every finance or accounting student is a member of the FSR. For already many years, we see more and more students with a Business Administration background become a member of the FSR. We have many events and possibilities to offer for RSM students interested in finance and/or accountancy, so we are happy with this trend. The position of the FSR as the study association for all students interested in finance and accounting in Rotterdam is continuously strengthening.

that have all been successful. Next to the International Masterclass and the Finance Day as described above, the Female Business Tour and Accountant Firms Day have taken place for the first time. We always try to look for new opportunities for the FSR and thereby expand our activities. We hope to address a large part of our target group at the Erasmus University with everything we do and thereby help them get in touch with career opportunities.

The academic year is almost coming to an end and with that our board year. We have been looking for talented and enthusiastic students to form the XIV FSR Board and we are happy to have found six ambitious successors who can’t wait to start their board year. I wish you all success with the final exams of this year and hope you enjoy the summer in Rotterdam or anywhere across the globe.

Another significant trend is the ongoing internationalization of the university. Every year more international students apply for a full time study or an exchange in Rotterdam. For this group, we organized an International Master class Job Hunting. This special master class gave all do’s and don’ts on how to apply for a job in countries from China to South-Africa. We hope that this master class was a first step of the global career that so many of us dream about.

The international aspect of the FSR does not only concern students coming to Rotterdam, but we also give Dutch students twice a year an opportunity to go abroad and experience different cultures. The participants of the European Finance Tour to Paris were the first ones to go abroad this year. In a very full week with inhousedays and company visits, twenty finance students discovered ‘la Défense’ the business district of Paris. Next to this serious aspect, they have taken enough time to find out about the cultural highlights and nightlife of this great city.

The prestigious International Research Project has recently returned from Singapore and Kuala Lumpur. For two weeks, ten finance and ten accounting students conducted research in the field of diversity. After the first two intensive weeks, the majority of participants chose to travel further into South East Asia. We would like to thank dr. Schramade and dr. Maas for their guidance of the research during the months of preparation, visit on location and finishing of the project.

The Bachelor Accountancy Day is a day organized for bachelor students every year to give them a first impression of accounting. This event has proven to be successful for many years and therefore we have set up an equivalent for young students interested in finance: the first Finance Day. This event was organized in cooperation with the EFR to reach many bachelor students. We are happy we can conclude that this event was a success and we hope it can take a fixed spot in our portfolio of events.

When looking back on the past months, we are proud that we have set up some very new events

FSR news • 41

fsrforum • volume 13 • issue #4

FSR Former board member

Coen Mensink

Passport Name: Coen Mensink Age: 34 Residence: Haarlem Employed at: ING Bank Current position: Director Event Finance Which FSR Board: FSR I Board function: Chairman Studies: Financial Economics (Finance and Investments) Year of graduation: 2002 Which car do you drive: Audi A4 What do you drink on a Friday night: A cold Grolsch Life motto: Ambition without a plan is merely a dream. It is determination and commitment to an unrelenting pursuit of your goals that will enable you to attain the success you seek.

My first big merger! Triggered by the billboards on the Erasmus campus, daring ambitious students to come and shape the major financial merger on the 14th floor of the H-Tower, I applied and not much later I was introduced to my fellow future board members, all of us eager to role up our sleeves and add another chapter to the evolution of an institution with strong foundations.

During our 1998-1999 FSR board year, the first post-merger year, we faced the major challenge of combining the two FSR predecessors, financing association Pecunia and the association for accounting and controlling Pacioli, into the largest study association among the various economic study associations at Erasmus university. Continuing the successful events from prior years and continuing to appeal to all students in our now wider span of coverage, while still managing to swiftly build a strong and recognisable own identity of the new FSR? A major challenge indeed.

Although I recall many memorable FSR moments, our first traditional strategy weekend does stand out. In my heavily overloaded red Citroën 2CV we headed to hotel Zeeduin in Noordwijk where we discussed and brainstormed about the activities and student services for the year ahead. With representatives from Pecunia and Pacioli and some obvious duplication between the two existing event calendars (of course this was also part of the rationale for the merger), combined with our intention to introduce some new 'typical FSR branded' events, this turned into some pretty tough negotiations. And that was even well before the simultaneous Annual General Meetings in October 1998 where the merger was supposed to be ratified by Pecunia and Pacioli members, a potential firing squad. Exhausted from all this, we headed for dinner on the boulevard where we were joined by Supervisory Board members from both associations.

On some of the points agreed in the afternoon the debate was reopened by SB members clearly defending their own 'pedigree' of finance or accounting. It was a healthy competitive spirit, where in the end we were all proud of the FSR about to emerge from all efforts and initiatives started in the year before. Time to celebrate... where else than in " 't Zeepaardje"? In the Ivy League of legendary FSR bars outside Rotterdam it is up there with the Crazy Pianos in Scheveningen.

After a great year, we handed over to a new group of enthusiastic FSR members to form the second FSR board to take us into the new millennium.

42 • FSR news

Early 2000 I went to Singapore as part of ABN Amro's International Internship Programme and subsequently I joined Merrill Lynch in London, as what turned out to be one of the last bull market hires before the burst of the internet bubble. I worked in the Corporate Finance department and after three years moved to the Financial Sponsors Group. End 2005 I joined Barclays Capital's coverage team for The Netherlands. In 2008 I joined the newly founded Event Finance team of ING, focusing on event driven, complex and multiproduct financing solutions. The team has a presence in Amsterdam, Madrid and Brussels, but has a pan-European scope. We support the relationship bankers in origination, structuring and execution of integrated capital structure solutions, often in the context of acquisitions, major refinancings, investment programmes or restructurings. As such, we work with many different product teams within ING, screening for opportunities, modeling and analysing the impact of various financing scenarios on the capital structure and key target metrics for our clients and presenting this as part of a broad strategic and financing dialogue.

The FSR played an important role in my career as it enabled me to get to know the financial industry from within and build a network of contacts in various banks and among students with similar interest in investment banking. Events like the International Banking Cycle and the London and Frankfurt Banking Tour enable you to network and to compare organisations, and most importantly their culture and their people, based on personal experience.

I have always had the pleasure of working in enthusiastic, ambitious and committed teams, with a good team spirit (both in and out of the office) and an open culture that is focused on knowledge sharing and making each other perform better. In such an environment you continuously teach and learn, you challenge and are challenged, with the aim to distinguish yourself and your organisation in pu rsuit of your ambitions. But most importantly… we have a lot of fun along the way and do not forget to celebrate our successes.

Not that different from our time at the FSR. Cheers!

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FSR Activity report Bachelor Accountancy Day 2011

On May 11th, although the RET were having a stroke, 70 students made it to be on time in the Cruise Terminal for the Bachelor Accountancy Day. Each year this event is organized especially for Bachelor students who have an interest in accountancy.

The goal of this event is to inform students about different aspects of the profession of an accountant. Deloitte, Ernst & Young, KPMG and PwC prepared a case for the students through which they could get more familiar with the day to day work of an accountant. During the case the students were challenged to show their interview skills in an interview with the financial director of the company they were auditing.

Above this the students were informed about the study curriculum for accountancy students at the Erasmus School of Economics and Rotterdam School of Management and the post-initial register accountant Master.

After the hard work the students could listed to the partnerforum. The partners of Deloitte, Ernst & Young, KPMG and PwC made some time in their busy schedule for this forum pursed by Mr. Gortemaker. During one hour the partners were questioned about different topics, reaching from workload to moral responsibility. The concluding drinks gave the students the opportunity to get deeper into conversation with the accountants and the recruiters of the Big-4.

We have received many positive reactions from both the students and the Big-4 which makes us very content. One behalf of the Financial Study association Rotterdam I would like to thank Deloitte, Ernst & Young, KPMG, PwC, Mr. Van der Wal and Mr. Gortemaker for making this day to a success.

FSR news â&#x20AC;˘ 43

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FSR Activity report European Finance Tour

The first week of April was the week were the European Finance Tour participants were heading to Paris. Before we went to Paris, we had a welcome drink at Café van Zanten and some great inhousedays at EFT partner companies in the Netherlands.

KPMG The first inhouseday was at KPMG with the Advisory Division.

KPMG started the day with some coffee and a presentation about the global firm and later specified to the advisory division. After the presentation KPMG had a case about valuating a company. A western company was interested in taking over an African coffee company.

The case was very interesting and so were the different outcomes of the groups. After the presentation and the feedback, we went to the bar for an informal drink to end the day. After all it was a great way to meet the people who are working at KPMG

Heineken The second inhouseday was at the Heineken Headquarter at Zoeterwoude. An employee of Heineken gave a presentation about the possibilities at the firm. Afterwards there was a case about the introduction of ‘light’ beer. After presentations there was a trip into the factory of Heineken. A great experience to see where many liters of Heinekens beer is made.

NIBC The Friday before our departure to Paris, we visited NIBC, a well-known Dutch bank. At NIBC we started with a good cup of coffee and an overall presentation of the Firm. After the intro we focused on an acquisition case about to Dutch supermarkets.

After the negotiations about the deal and the acquisitions were made, we had an informal drink were many employees of NIBC were present. It was a good warm-up for our trip to Paris the next week.

Paris On the 4th of April in the early morning we left with all of the participants from Rotterdam Central Station. After a short journey we arrived at Station Gare du Nord in the middle of Paris. We dropped our luggage at the hotel en went to the OECD and the Dutch Embassy. Both of them are located on a historical place just outside the city-center of Paris.

The second day we visited BNP Paribas. One of the largest retail banks in the world, headquartered in Paris. BNP Paribas is a very interesting bank which has a lot of job opportunities for graduated students. At the end of the day we visited the room of the CEO of BNP Paribas, the room which is also used

by Napoleon Bonaparte for his marriage, quite amazing!

On Wednesday we visited Rabobank, a large Dutch bank with ambitions to grow abroad. Rabobank told us about the oppor-

44 • FSR news

tunities for a Dutch bank in become a large player in the agricultural market abroad.

During the week, there was enough time to visit the cultural aspects of Paris. Especially on Wednesday, at that we visited the Eifel tower, Le Louvre, the Moulin Rouge and much more.

The day afterwards we visited Nomura, an Investment Bank with strong Japanese roots. Nomura grow extremely hard after the acquisition of a large part of Lehman Brothers. Two Dutch employees traveled to Paris to give an interesting presentation about the global company.

Of course there was also time to get a feeling of the nightlife in Paris. At Thursday we visited a famous club in de middle of Paris, everybody had a great time!

At the last day we visited KPMG in Paris. KPMG gave a lot of views about working in Paris or anywhere else around the world. At the end of the day, just before our journey back to the Netherlands we had discussion with the people working for KPMG about the benefits and pleasures of working in a different country.

After all it was a great journey with a lot of interesting company visits! Paris is a very diverse and multicultural city and above all, a great place to spend some time!

FSR news â&#x20AC;˘ 45

Een duurzaam ontwikkelde carrière gaat langer mee.

Academisch toptalent Je eerste baan is tegenwoordig vrijwel nooit je laatste. Maar vaak wel de baan die de rest van je carrière beïnvloedt. Droom jij van een loopbaan bij een multinational of de overheid, dan is de keuze voor je eerste werkgever eenvoudig: Deloitte. Veel topbestuurders in Nederland danken hun huidige positie aan een carrièrestart bij Deloitte.

En dat is niet toevallig. Bij ons werk je namelijk al vanaf dag één voor toonaangevende organisaties aan innovatieve en vooral duurzame oplossingen. Niet omdat duurzaamheid vandaag de dag in de mode is, maar omdat wij weten dat het de sleutel vormt tot de businesskansen van morgen. Waardoor jij je kansen op de arbeidsmarkt ook weer verder vergroot.

Zoek jij de beste start van je carrière? Begin eerst hier: werkenbijdeloitte.nl.

fsrforum â&#x20AC;˘ volume 13 â&#x20AC;˘ issue #4

FSR Activity report Young Financials Diner

On the 30th of March, a company dinner especially for Finance students took place: the Young Financials Dinner.

Twenty talented students and four potential employers were present on this evening to get to know each other. After a welcoming drink, the representatives of Aegon, Holland Corporate Finance, Kempen & Co and NIBC shortly introduced themselves and the company they work for. The three courses of Restaurant KIP tastes delicious and the students switched tables after each dinner round. As a result, they have talked to three companies in an informal way and the companies had the opportunity to tell about their workfield, the company culture and anything they wanted to share with the students.

The evening is concluded with several drinks at the bar of the restaurant after which everyone travelled back home. We hope that all students have received valuable information and an impression of the atmosphere at four companies they might be working for in the future.

FSR news â&#x20AC;˘ 47

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Company presentation Flow Traders Outsmarting the competition

Would you not like to get a kick out of your job? To be able to see the results of your cleverly thought out moves directly? You might just find that at Flow Traders, whose headquarters are situated in our capital.

Let us see what else this trading company has to offer.

Being part of the modern INIT building - a building in which multiple companies can be found - the Flow Traders office looks great, as does the room in which this interview took place. Our interviewee is a young man, who introduces himself as Jori Kretzers. First, he tells us about how he ended up as a Flow Trader. “During my studies in Finance & Investments at the Rotterdam School of Management I went to a lot of recruitment and in-house activities. One of those activities was the in-house day here at Flow Traders. All I can say is that, by the end of the day, I was extremely enthusiastic about this firm, which was quite surprising, since I had my mind set on becoming a banker in a city like London. During my internship here in 2009 my feelings got reconfirmed and that was when I knew: this is what I want to do. I graduated in September of that same year with a thesis on commodities, and I was welcomed back here as a Junior Trader a month later.”

Welcome to Flow Traders So what do you actually do as a Flow Trader? As you might have guessed from the company’s name, they trade. They do so by means of ETFs, Exchange-Traded Funds, which are funds that hold assets such as bonds, equities, commodities and currencies. “ETFs grew in popularity due to the lower expenses involved in comparison to the more traditional funds created by financial institutions. Nowadays, Flow Traders is the largest ETF Market Maker in Europe, which is quite impressive considering we only started seven years ago.”

Since you are responsible for a large amount of money, you

48 • Company presentation Flowtraders

begin your career at Flow Traders in the training program. “The training, which takes place in small classes, consists of theory as well as practice and workshops given by senior ­colleagues.”

When we ask Jori whether the average finance knowledge of econometricians would be enough for a job as a trader, his answer is: “It definitely gives you a head start. But, even though I might have had an advantage over some others with my background in finance, others catch up quickly on the financial concepts that need to be grasped. I even have a colleague who studied agricultural technology before coming here. What is more important is that you are motivated and able to keep up with the pace”. Once you finish the training, which takes a couple of months, you start trading and, after having been with Flow Traders for a year, you go into permanent employment.

Nine to five?

Are we dealing with a nine to five job here? Actually, a day as a trader takes a bit longer. “I usually walk in at around half past seven in the morning. I start my day by checking the administration on the trades of the day before, which are processed overnight. I analyze the markets overnight in Asia and the U.S. and foresee events (e.g. company announcements, interest rates decisions or other news releases) that are expected during the day. Around nine o’clock most European markets open and trading begins.” There is more to it than that though. You cannot stay on top without innovation. Therefore, another part of a traders’ job is creating new strategies: coming up with new and better ways to make money. “The market, however, does not wait for us. You could say that, on an average day, we trade 80% of the time and we work on new projects for the other 20%. We have to watch the market continuously; so on some days where we barely have time to work on new strategies, while on other days the market can be so ‘calm’ we trade only for 60% of our time. This goes on until the market closes, which is around half past five for most European markets. After that you do some administrative tasks or finish the project you have been working on. After closing-up, it is time for everyone to head to the relaxation room, which is stacked with Xboxes, arcade games, a poker table and more fun stuff. It is great to catch up with some colleagues, who I easily call friends just as well, and another hour flies by before heading home.” All in all, you do not spend too little time at Flow Traders, but that makes sense when working with a market that is, in fact, open twenty-four-seven: all markets intertwine globally, so there is a lot going on. “Our headquarters here in Amsterdam take care of the European markets, the office in Singapore looks after the Asian markets, and the one in New York handles matters in the Americas. The latter will actually be my working place as of tomorrow!”

New York For Jori, living in another country is nothing new, having lived in France and Australia with his parents, who are true expats. “I am used to travelling and even though my parents currently live in the Middle East, I have still seen them, on average, every two months for the last couple of years. I also spent a semester studying in California and I just came back from a vacation to Las Vegas and Los Angeles with a friend of mine, more or less to celebrate all the good things that came onto our paths since graduation. Going on vacation or having other appointments is not a big deal here at Flow Traders, by the way, as we accommodate by having a team-based approach to trading. Now back on topic, working abroad has always been on my mind. Hence, I applied for the position in New York when the opportunity arose. There are currently fifteen employees in the

New York office, of which about half are specialized in IT, as in the other offices: in our field of work, every (sub-)millisecond counts which makes us heavily dependent on our technology to remain successful. The traders in New York have been to our Amsterdam offices for the training program and most of them have also worked for several years in Amsterdam. There are currently two Americans here in Amsterdam, who are following the training program, only to head back to New York afterwards. Needless to say I am very excited to go to New York.

It will be a new challenge where I can seek out new trading opportunities and continue to grow as a trader.

Why work at Flow Traders?

So what is so great about being a Flow Trader? “The company continues to deliver exceptional performance compared to its peers. This is a direct result I believe from having an emphasis on our people and technology, as the company encourages teamwork, creativity, innovation and gives you lots of opportunities. It is also why I chose for Flow Traders.

After researching its competitors in the Netherlands the

Flow Traders, named ETF Market Maker Europe 2009 by the Global ETF awards, is an international leader in electronic arbitrage trading and market making. Founded in 2004 and headquartered in Amsterdam, Flow Traders trades equities as well as derivatives, currencies and bonds on exchanges around the world. Distinguishing itself with razor-sharp technology, Flow stays ahead of the competition by focusing on speed and niche competencies in markets where every second counts.

Effective arbitrage trading consists of seizing opportunities in fleeting, simultaneous price differences in related financial products. It requires access to the best information and the ability to respond instantly. To achieve this, Flow develops its own software in-house. Our team of software developers works in partnership with experienced traders to identify and execute tomorrow's strategies, making Flow a daily pioneer in professional trading.

factor that differentiates Flow from others are the people behind it. At Flow we have a flat and informal culture with only Dutch speaking traders, where knowledge is shared quickly and openly which makes vital information very accessible in a timely matter. I really hit it off with the team immediately: since working together is an important aspect of our job, it really helps. After all, everyone is here to do the same thing: helping the company improve. Earnings are not to be forgotten either and successes are being shared. Considering a good Flow trader can retire after ten years, but a real trader can’t be stopped. What is more exciting, however, is the kick trading gives and seeing the results of your work, which you achieved by outsmarting the competition.

Amongst one another we are a little competitive as well, more or less as in sports. This is reflected in our approach to work, but of course also in the after-hours at the Xbox ­consoles!” Lastly, what happens though, when a trade does not go as planned? “Well, all you can do is learn from your mistakes, but then again, as Flow Traders, we usually tend to profit from others making mistakes.”

Flow, a privately held financial firm, keeps pace with global markets. Growth, by continually building its team of exceptional talent. Our business expands each day by adding new products across an ever-broadening range of markets around the globe. But the backbone of our success is the collection of creative doers, thinkers, and above all, believers who form our team. We at Flow believe in the team effort and value our people. We like to think that talent grows at Flow and stays at Flow. To ensure this, we provide our employees with the best working environment, the latest technology, continuous support, and we go out of our way to retain the small business feeling with which we have started.

Do you want to be part of our success?

Please send your application; CV and motivation letter to jobs@flowtraders.com. For more information contact Recruitment +31 20 799 6799.

Company presentation Flowtraders • 49

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FSR Activity report Female Business Tour 2011

On Thursday May 19 a new FSR event started: The Female Business Tour. During this two-day business course a group of 20 female students visited various companies and explored the opportunities within these enterprises. There was also a dinner for the students and the company representatives to become acquainted with each other in an informal way. It was a great experience to visit these companies where the finance department is often still dominated by men.

It might be a man’s world but it would be nothing without a women.

The first day of this tour started with a case at AEGON in The Hague and was followed by another case at Heineken in Zoeterwoude, obviously concluded with a drink. After a nice dinner and a night in a hotel in Amsterdam, we started the second day at the Boston Consulting Group. The tour ended

50 • FSR news

with a workshop and a drink at PostNL (at the time of the tour still named TNT Post) in The Hague.

During the cases and visits at the companies, the twenty participants got a lot of attention of the male workers. Our tour has not been unnoticed...

After two intensive but also enjoyable days with case studies, presentations, lunches, drinks and a dinner we can look back on a successful event. Next year there will certainly be a second edition, probably in a different time period so keep a close eye on our website!

FSR news • 51

Eigen klanten is voor mij een uitdaging

We zijn de grootste zelfstandige accountants- en adviesorganisatie in Nederland en groeien nog steeds.

Met ongeveer 1.600 medewerkers bedienen we vanuit 47 kantoren 44.000 cliĂŤnten.

Wil jij een actieve bijdrage leveren aan die stijgende lijn? We bieden je graag alle kansen om je eigen koers te bepalen.

En dat zeggen we niet zomaar.

We streven naar innovatie, creativiteit en kennisontwikkeling. Eigenschappen als lef, gedrevenheid en puurheid kunnen we daarbij goed gebruiken. Overigens zorgen we niet alleen voor volop mogelijkheden om je ambities waar te maken, maar ook voor een gezonde balans tussen werken en vrije tijd.

www.werkenbijacconavm.nl Ruimte voor onder nemen !

fsrforum • volume 13 • issue #4

FSR Activity report Finance Day

On the 24th of May the FSR and EFR jointly organized a new event for bachelor 2 and 3 students interested in Finance.

The Finance day is intended to give bachelor students a practical insight in the challenging financial world. By attending the Finance Day, students get a better understanding of Finance and can make a better decision whether a minor or major in Finance will fit them.

The Finance Day has two different tracks that students could choose to follow a trading track hosted by financial derivate trader Optiver or a banking track by strategic business situations developer Atazar where students played the role of a retail banker.

The day started with a plenary session were both the banking and trading groups came together. Optiver and Atazar held a short introduction about their company and a short outline of their day program. After the introductions the word was to Former ABN AMRO executive Ravi Sankaranarayanan who gave a presentation about the financial crisis from a retail banker perspective. He answered questions as: What caused the crises? Is the crises already over? What should we do in the future to prevent these situations? What were the problems when ABN AMRO negotiated with Barclays and later the consortium of RBS, Fortis and Santander? After the enthusiastic and inspiring presentation of Ravi the groups split up and followed their preferred track.

Trading Track – Optiver A potential trader can spot errors, see opportunities, and make decisions in just a matter of seconds and is always alert for movements in the market. Optiver had its own way to find out who could do this best by surprising the students with a numerical test. After the test Optiver explained everything about derivates, arbitrage and how to make a market. At the end of the day students could bring their just gained knowledge into practice by playing the market making card game.

change when you are confronted with a sharp drop in clientele due to financial downturns?

The day was closed with a social drink where students could talk with company representatives and had the chance to ask questions. The first edition of the Finance Day can be called a great success! The participating students, Optiver and Atazar were all very enthusiastic about the content and organization of the day. In the coming years we hope that this event will get a fixed spot in the agenda.

Banking Track – Atazar In the banking simulation hosted by Atazar students played the role of decision maker of a large financial institution. The teams competed against each other via a computer simulation. The teams were confronted with several strategic issues as: How do you cope with sudden employee strikes? Would you invest, as CEO, in an industry of which you are not sure it will give you good returns? How does your decision-making

FSR news • 53

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FSR Activity report Investment Banking Masterclass

On May 10th 2010, 40 students came together for the second edition of the FSR Investment Banking Master class. During this two-day event, the selected students got the opportunity to follow a valuation course on the first day, provided by Training The Street and test their theoretical skills in practice during the case of Barclays Capital the next day.

On the first day, the students were paying attention at D. Zane Hurst. Teacher of Training The Street. He gave a valuation course during the entire day. In a very high pace, all of the valuation subjects that matter were discussed. After the first day, it was time for the students to put their new knowledge in practice.

The second day, Barclays Capital visited the Erasmus Campus.

In the morning they provided a Sales & Trading workshop.

This was a great moment for the participants to practice their sales skills. After the lunch it was time for the Investment Banking Department to present their case. This case was about a valuation of a company. At the end of the day Duncan Goelst, Managing Director at Barclays Capital, gave an inspiring presentation. The day ended with a nice informal drink, where the students could ask their question to the bankers at Barclays Capital

54 • FSR news

fsrforum • volume 13 • issue #4

FSR Alumni Association

Winter time is a long time behind us, spring is upon us with some really nice temperatures, and everybody is already looking forward to the summer! A time of study, exams, work, a late ski trip or even a really nice study trip to Singapore and Kuala Lumpur. Furthermore, the nights out and parties with lovely food, and (lots of) drinks. What you don’t realize, when you’re eating your twelfth sushi, or your “last” beer of the night, is the way the food took from for example the harvest to the point that the food was made.

It is taken for granted that the grain, which is part of your beer and the rice of your sushi, made a trip around the world. For example, rice is mainly grown in Asia. From start to finish of the production, there is a lot that happens to get it from the initial point to us, the consumer!

Commodities on a ship that navigates from A to B, do they have one owner during the transport?

Nothing is farther from the truth.. This is the domain of the commodity trader! A string, a circle or shall we agree on a wash out? With trading on these commodities a high return can be made. If the forecast is that the price will decrease in times of transport, agree on a circle: you’re selling to party A, who is selling to party B, party B will sell back the commodities to you.

Voilà, as simple as it is. What to do if a batch of commodities is in your possession, but the price decreased too much with a forecast on better prices later? Store the commodities in a warehouse. Bizarre, but the truth: over the whole world, warehouses are packed with commodities, waiting on better prices to sell!

Really interesting business, but with a lot of risks, which need to be covered as well. Risk management is therefore a really important part of the commodity trading business. Speaking about risks, when is the risk at your side? And when do you transfer the risk on the commodities to the buyer? These are really important questions to decide on the moment of realizing the sale for an auditor.

Commodities, a brilliant world for both accounting and finance professionals! You probably didn’t realize that when you were enjoying the BBQ after the Philips FSR Alumni Golf Tournament!

Speaking about drinks and dinner; we are planning a big FSR Alumni Dinner in fall. So keep that in mind!

Anna Nijdam Vice Chairman FSR Alumni Association

FSR news • 55

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Highlights of last year

Keep an eye on our website for the exact dates for the upcoming year!

October Big 4 Cycle

April National Investment Competition

Meet the 4 largest accounting company’s.

Invest and be a winner!

International Banking Cycle The investment in your career.

May Bachelor Accountancy Day

November Traders Trophy

Will you choose accountancy?

Can you handle the pressure?

Learn to valuate, like an investment banker.

December Multinational Diner Get to know the leading Dutch multinationals

Investment Banking Masterclass Female Business Tour It might be a men’s world but it would be nothing without a woman.

Corporate Finance Competition Five star event: hotel, companies and participants!

January Accountant Firms Day

International Research project Kuala Lumpur & Singapore, diverse yourself.

Create your own goodwill!

February Financial Business Cycle Explore the financial opportunities.

March Young Financials Diner Get to know interesting financial companies.

Multinational Battle Five multinationals, five battling cities, are you part of it?

56 • FSR news

June Ernst & Young Drink Get to know the employees and the company.

Finance Day The first step in your finance career.

www.werkenbijpwc.nl

Of heb jij een beter idee om alle facetten van de financiële wereld te ontdekken?

Financial Traineeship

Financial Traineeship Vanaf september 2011 Judith Verschoor 088 792 53 79 judith.verschoor@nl.pwc.com

Sta je op het punt een financiële master af te ronden, dan ligt de wereld aan je voeten. Het bedrijfsleven staat te springen om talent met een financieel fundament. Wil je meer weten over dit tweejarig coachings- en opleidingstraject, neem dan contact op met Judith. Of ga naar www.werkenbijpwc.nl/financialtraineeship

© 2011 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.

Blijkt de universiteit ineens een vooropleiding.

Diederik van de Scheur Consultant TAS

Piet-Hein Touw Staff FSO

Een succesvolle carrièrestart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien Ên hoe je dat voor elkaar krijgt staat altijd aan de basis. Ernst & Young coacht jou actief op weg naar jouw succes. We bieden je volop kansen in de wereld van assurance, tax, transaction en advisory. Ontdek ze op ey.nl/carriere