DRAFT 6/14/2007 2:31 PMWorld Bank Presentation
Page 1 6/14/2007
Reserve ManagementThe Commodity Bubble, The Metals Manipulation, The Contagion Risk To GoldAnd The Threat Of The Great Hedge Fund Unwind To Spread ProductTo: Global Central Bankers at the World Bank Executive ForumFrom: Frank VenerosoApril 17, 2007Revised as of today July 19, 2007
Thank you for this second invitation to speak at your treasury management conference.Last year I was asked to speak only because Larry Summers, who was scheduled tospeak, could not make it at the last moment and I was asked to fill in. I chose to speak onthe subject of the global commodity bubble as well as the U.S. housing and housingfinance bubble and their eventual bursting. My presentation was a bit on the histrionicside, and I know it was greeted with a certain amount of amusement. But I certainly didnot expect that it was of enough interest to warrant a second invitation to speak on thesame topic – particularly with the more august speakers available such as LarrySummers.Perhaps I am reading more into this invitation than I should, but it seems to me that theevents that have transpired over the last year must have intrigued some of you with thethesis that we have had a commodity and a housing bubble, that they may be in the process of bursting, and that this may have some relevance to central bankers and toreserve management.Last year, I did not really focus on central bank reserve management, but I thought thatthis year I might direct my train of thought to some reserve management issues. So, inwhat I have to say today, I will try to work towards two assessments: first, the outlook for gold as a reserve asset, and second, the outlook for spreads and the yield curve, which isobviously very relevant to reserve management.The following paper is very long. So let me give a road map of where I will be going.In the first part of this paper on the “Commodity Bubble”, I make the case that, in realterms, we have had an unprecedented commodity bubble in this decade. This bubble hasoccurred because of unprecedented investment and speculation in commodities, largely by way of derivatives. The far more important engine of this bubble has been leveragedspeculation by hedge funds. Over the last two years prices have climbed even though themicroeconomic fundamentals of commodities have deteriorated. There lies ahead a bursting of this commodity bubble. It is now being triggered by deterioratingfundamentals and it will be exacerbated by eventual investor revulsion which will reversethe extraordinary fund flows that have created this bubble.