FSR Forum June 2011

Commodities

13th VolumeJuni 2011issue #4

Female Business TourIt might be a man’s world

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fsrforum • volume 13 • issue #4

2 • Preface

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 dis-

cussion, 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.

Preface • 3

In this issue of the FSR Forum you can also find an interview with Willem Middelkoop. Mr. Mid-

delkoop 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

×


4 • Table of contents

Commodities

Table of contents

ColofonFSR FORUM appears five times a year and is an edition of the Financial Study Association RotterdamKvK Rotterdam no: V 40346422VAT no: NL 805159125 B01ISSN no: 1389-0913

13th volume, number 4, circulation 1300 copies

Editor in chiefKim de Vries

Editorial department Rick KlootwijkBarnabé LacroixRishi Sripal

Editorial advisoryDr. M. B. J. SchautenDr. W. F. C. VerschoorDrs. R. Van der Wal RA

With the cooperation ofDrs. J. G. Groeneveld RA RVDr. R. Huisman W. MiddelkoopS.K. RoacheM. RossiJ. BaffesT. HaniotisDr. N. SaidiDr. F. Scacciavillani

Editorial addressEditiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06Postbus 1738, 3000 DR RotterdamTel. 010 408 1830E-mail: [email protected]

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

The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?Shaun K. Roache and Marco RossiCommodity 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

market participants that take their decisions based on price fundamentals. 6

Placing the 2006/08 Commodity Price Boom into PerspectiveJohn Baffes and Tassos HaniotisThe 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

Table of contents • 5

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FSR News

Word of the chairman 41

FSR former board memberCoen Mensink 42

Bachelor Accountancy Day 2011 43

European Finance Tour 44

Young Financials Dinner 48

Female Business Tour 2011 50

Finance Day 53

Investment Banking Masterclass 54

FSR Alumni Association 55

FSR Activity Agenda 56

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

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

Shaun K. Roache and Marco Rossi

July, 2009

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

I. INTRODUCTIONCommodity prices have not been immune to the recent pro-

tracted 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 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.

Using an event study methodology that has been used success-

fully 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-

tially key factor that traders may wish to consider when

effecting transactions. Reflecting its special role in the inter-

national 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. Literature ReviewAsset prices and macroeconomic announcementsPrevious 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

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 com-

modity 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 rela-

tionship, however, is between the U.S. dollar and commodity

prices, and there is a building consensus that macroeconomic

news does affect exchange rates.

Andersen et al (2002) explore the relationship between macro-

economic 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 move-

ments 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.

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.

A focus on commodities and goldCommon themes have emerged from the literature focused

on commodities and announcements. The number and sig-

nificance 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.

B. Data

Commodity pricesWe 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 bench-

mark 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, »

Gold also appears sensitive to news related to supply and demand

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)).

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

Same day Previous day

Gold future Gold spot U.S. dollar Gold future Gold spot U.S. dollar

Gold future 1.00 0.26 -0.44 0.00 0.02 -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 con-

vincing. 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 funda-

mental 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 per-

ceived 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.

Macroeconomic announcementsCommodity prices, in common with financial assets, incor-

porate 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 esti-

mate 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

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.

C. Estimation StrategyThe problem with ordinary least squares (OLS)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 approachWhen 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:

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 sug-

gests 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 effectThe 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

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 var-

iable (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)

“Good news”—“bad news” and volatility effectsUp to now, our analysis assumes that commodity price sensi-

tivity 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 condi-

tioning models (see Galati and Ho (2003) and Erhmann and

Fratscher (2005)). This composite aggregates the surprise

element of the announcements into a single series, greatly

simplifies the model, and increases the number of observa-

tions. 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 com-

pare our results against a base model that estimates the

regression of the log change in the gold price Δp on to a con-

stant α, the contemporaneous value and two lags of the com-

posite 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 »

We assume that all causality runs from the U.S. dollar to the commodity price

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 vola-

tility. The mean equation for the GARCH model then

becomes:

(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 confi-

dence, 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 AnnouncementsA 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 higher-

than-expected level of economic activity. The results are not

consistent across commodities, with energy products tend-

ing 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-

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

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, particu-

larly for base metals, even when controlling for the effect of

the U.S. dollar.

For gold, this apparent counter-cyclicality in the very short-

term 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 inflation-

hedging properties of gold have diminished, but instead sug-

gests 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 sur-

prises 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).

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 evi-

dence of gold’s dollar-hedging characteristics. Indeed, the

Commodities are not just financial assets and gold is not just another commodity.


U.S. dollar’s influence is unsurprisingly strong for gold, with

the effect of some individual announcements losing signifi-

cance when a control for this relationship is included in the

model. In contrast, the pro-cyclical sensitivities are height-

ened 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 rela-

tionship 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 sur-

prises 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 VolatilityGold 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 unsur-

prisingly, 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 deterio-

rate. There is also the potential for significant non-linearities

in gold price sensitivities, although we do not address that

possibility in this paper.

Gold price more sensitive when uncertainty is highFor the U.S. dollar we confirm the standard result that sensi-

tivity 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).

IV. CONCLUSIONOur results suggest that commodities are not just financial

assets and gold is not just another commodity. Some com-

modity prices are influenced by the surprise element in mac-

roeconomic news, with evidence of a pro-cyclical bias, par-

ticularly 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 longer-

term 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 com-

modities to macroeconomic developments.

References on request

Notes1 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.

Accountancy - Belastingen - Advies

Wat belangrijk is, laat je niet los.

Ik wil ruimte om te groeien. Waar zet ik de volgende stap?

Waar je ook bent, belangrijke beslissingen zijn nooit ver weg. In je rol als accountant en bij het bepalen van je volgende carrièrestap. Bij Grant Thornton begrijpen we dat je voortdurend bezig bent met je groei. Sterker nog, wij zijn er zelf ook mee bezig. Onder andere door jouw ambities alle ruimte te geven en door je talent te versterken met een goed doortimmerde opleidingsaanpak. Meer over ons op onze website.

www.carrierebijGT.nl

Grant Thornton bij jou in de buurt:Alphen aan den Rijn - Amsterdam - Boskoop - Gouda - Leiden - Rijswijk - Rotterdam - Woerden


The Role of Gold in the New International Financial Architecture Moving to a ‘Hard SDR’ • 13

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

Dr. Nasser Saidi and Dr. Fabio Scacciavillani1

»

IntroductionThis 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 numé-

raire for international transactions and therefore as an inter-

national reserve asset.

In relation to point 1) the paper stresses the danger of a fiscal

overhang from the financial crisis and the inflationary pres-

sure 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 inter-

nationally 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 tip-

ping 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 interna-

tional transactions.


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

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 sup-

plied by a widening current account deficit in the US. There-

fore 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).

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 ade-

quate 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 expec-

tations 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 con-

strained by a government bond market fragmented along

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


»

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 govern-

ment 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 Chi-

nese 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 con-

vertibility 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 pro-

vide 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 supra-

national 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 allo-

cation 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 meas-

ures 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 AnchorThe 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 mono-

currency 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



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 Mod-

eration 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

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 circum-

stances, such as heightened tensions in financial markets,

security threats, high inflation, tends to increase when meas-

ured 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


»

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 prob-

lems. 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 SDRWe 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 cur-

rency 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 transac-

tions 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 distributed to member countries in proportion to their

quotas. The total stock of SDR amounts to 204 billion (equiv-

alent 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.

Gold is perceived as a hedge against extreme events.

This increased SDR supply however is not large enough to

address the fundamental imbalances and to provide a signifi-

cant alternative to dollar denominated assets in central bank

reserves. The revamp of the international monetary system

around a completely new currency and the supporting insti-

tutional 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 cur-

rency 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 cur-

rencies (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



reviewed periodically (every 3 or 5 years) in order to take into

account the changes in the relative trade, financial and over-

all 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 cur-

rent 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 mon-

etary 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.

ConclusionsThe 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 con-

junction 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 con-

figuration reminiscent of the first phase of globalization at

the turn of the XX century; b) the role of the US dollar as a

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 pro-

grammes 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 architec-

ture) 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 arrange-

ment 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 pre-

vailed, 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 commit-

ments both domestically and internationally. Even though

the US represented the epicenter of the crisis, US dollar

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


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 move-

ments 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 interna-

tional 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).

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

standard heydays or the Bretton Woods system -- but never-

theless 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 interna-

tional 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 mem-

bers the option to take loans denominated in gold or in SDRs

(or a combination of the two).


Notes1 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 de-pression 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 interna-tional currency. However, Kindleberger's analysis was suitable for a situation in which an econ-omy is dominant. With the emergence of several great economic powers is very much in ques-tion 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 denomi-nated 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 unex-pected 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

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fsrforum • volume 13 • issue#4

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

Placing the 2006/08 Commodity Price Boom into Perspective

John Baffes & Tassos Haniotis

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

1. IntroductionThe 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 numer-

ous calls for coordinated policy actions at the national and

international level to address food availability and food secu-

rity concerns.

To put the recent commodity boom into perspective calls for

a good understanding of the key characteristics and determi-

nants 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 non-

energy 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 agricul-

tural 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 low-

income 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 com-

modity 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 longest-

lasting 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 agricul-

ture—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 eco-

nomic 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 »



institutions that chose to include commodities in their port-

folios; 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 bio-

fuels (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 com-

modity 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 atten-

tion (or even subjected to a considerable amount of misinfor-

mation) 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.

BiofuelsThe increasing interaction between the price movements of

energy and non-energy commodities during the boom

focused attention on the impact of growing demand for bio-

fuels, 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

that biofuel production will double by 2018, to an assump-

tion 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 ele-

ments, 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

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 non-

binding (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 TrendsThis 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 betweenThe long-term behavior of commodity prices was first examined systematically by Prebisch »

Effect of biofuels on food prices has not been as large as originally thought.



(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 corner-

stone 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 identi-

fying 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-sta-

tionarity, 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 sensi-

tivity 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

similar). All lend strong support to non-stationarity, thus

reaffirming the conclusions reached by Cashin and McDer-

mott (2002) and Deaton (1999).

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 vari-

ability 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 sta-

bilization (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.

Co movementBecause 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 fundamen-

tals or policy actions in one market will eventually be trans-

mitted 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.

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


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 lit-

erature 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 RemarksNumerous 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: specula-

tion, the growth of demand for food commodities by emerging economies and the role of bio-

fuels. 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 con-

clusions 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. Fol-

lowing 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 meas-

ures 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.


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.

W W W.GA A AN.NU

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

ANderhAlf UUr voor de eiNdbesprekiNG vAN

de jA ArrekeNiNG vAN eeN Groot recl AmebUreAU

-04312_adv_420x297_garage_OF.indd 1 23-02-2011 14:55:42


30 • Interview Willem Middelkoop

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 al-leged 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 com-modities. 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.

Interview Willem Middelkoop • 31

»

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 explana-

tion to it. Gold is softer than many other metals, and it is a rela-

tively 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. Tung-

sten, or wolfram, shares a weight comparable to gold and ura-

nium. 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 temper-

atures 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 dollar-denominated 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-cen-

tered. 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 confer-

ence in Bretton Woods, to which all finance ministers were con-

vened. Americans used the conference to present a new mone-

tary 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 cur-

rencies. 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 rollercoaster-ride over the past few weeks. First a sharp increase in response to the Arab Spring, and now a significant cor-rection 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?

The dollar is not 'as good as gold' anymore


32 • Interview Willem Middelkoop

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 rein-

forces 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 conse-quence 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 asso-ciated 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?

It depends on several factors: now it is very difficult to a physi-

cal 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 –unsecured-

money. 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 spec-

ulative 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 gov-

ernment 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 per-

centages 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, bond-

holders receive precedence over the saving’s depositor. At the

moment it is not very popular to leave a large part of your

Interview Willem Middelkoop • 33

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 indi-

cation 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 wel-

come 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.

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

<On the pursuit of professionalism >

We view professionalism as the product of excellentabilities and execution. We pride ourselves on it in everythingwe do. Being professional is about setting the higheststandards of performance and wanting to excel. If you havethe same standards, we would like to hear from you. For our Analyst Program, NIBC is looking for universitygraduates who share our pursuit of professionalism. Personaland professional development are the key-elements ofthe Program: in-company training in co-operation withthe Amsterdam Institute of Finance; working side-by-sidewith professionals at all levels and in every financial disciplineis part of learning on the job. We employ top talent from diverse university backgrounds,ranging from economics and business administration, tolaw and technology. If you have just graduated, withabove-average grades, and think you belong to thatexceptional class of top talent, apply today. Joining NIBC’sAnalyst Program might be the most important careerdecision you ever make!

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Interested? Please contact us: NIBC Human Resources, Frouke Röben, [email protected]. For further information see www.careeratnibc.com. NIBC is a Dutch bank that offers integrated solutions to mid-market clients in the Benelux and Germany. We believe ambition, teamwork, and professionalism are important assets in everything we do.

NIBC adv. Professionalism A4 10-08-2009

<On the pursuit of professionalism >

We view professionalism as the product of excellentabilities and execution. We pride ourselves on it in everythingwe do. Being professional is about setting the higheststandards of performance and wanting to excel. If you havethe same standards, we would like to hear from you. For our Analyst Program, NIBC is looking for universitygraduates who share our pursuit of professionalism. Personaland professional development are the key-elements ofthe Program: in-company training in co-operation withthe Amsterdam Institute of Finance; working side-by-sidewith professionals at all levels and in every financial disciplineis part of learning on the job. We employ top talent from diverse university backgrounds,ranging from economics and business administration, tolaw and technology. If you have just graduated, withabove-average grades, and think you belong to thatexceptional class of top talent, apply today. Joining NIBC’sAnalyst Program might be the most important careerdecision you ever make!

Want to know more? Surf to www.careeratnibc.com.

T H E H A G U E • L O N D O N • B R U S S E L S • F R A N K F U R T • N E W Y O R K • S I N G A P O R E • W W W . N I B C . C O M

Interested? Please contact us: NIBC Human Resources, Frouke Röben, [email protected]. For further information see www.careeratnibc.com. NIBC is a Dutch bank that offers integrated solutions to mid-market clients in the Benelux and Germany. We believe ambition, teamwork, and professionalism are important assets in everything we do.

NIBC adv. Professionalism A4 10-08-2009


Should we fear investors in commodity markets? • 35

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 com-

modity 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 typi-

cally think it's unwanted that investor demand for commodi-

ties 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 any-

where 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

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 vola-

tility 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.

We know that stock prices can go anywere in the long run; the sky is the limit.

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38 • Pindakaas


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” (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 ver-

zoek 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 financieel-

econoom 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 Han-

delsblad “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 Spring-

dance over “de prilste, zelfs onrijpe moderne en conceptuele

“Museum Boijmans Van Beuningen heeft de befaamde Pin-

dakaasvloer (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 voor-

stellen. Het moet een kostbaar werk zijn. Een potje pinda-

kaas 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?

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 spec-

taculaire La berceuse (for Van Gogh) te zien in de Nacht-

wachtzaal 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

“Met kunst is het als met humor: als je het wil verpesten, moet je vooral gaan uitleggen”

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.

Pindakaas

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

Pindakaas • 39

(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.

Onze banken zijn niet door de overheid gered en vervolgens gerestaureerd vanwege werkgelegen-

heid 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.

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

⎥⎦W.we∼kΨnbijmΕzars.⇔ ←

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

Ga verder met Mazars.

0475.00.596 WT Rules BS_210x297_FC.indd 1 21-08-2008 11:13:06

FSR news • 41

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 stu-

dent 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.

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

that have all been successful. Next to the International Mas-

terclass 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 Uni-

versity 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.



42 • FSR news

FSR Former board member

Coen Mensink

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 mem-

bers, 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 tra-

ditional strategy weekend does stand out. In my heavily over-

loaded red Citroën 2CV we headed to hotel Zeeduin in Noord-

wijk 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.

Early 2000 I went to Sin-

gapore 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 inte-

grated 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 stu-

dents 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 per-

form 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!

PassportName:

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.


FSR news • 43

FSR Activity reportBachelor Accountancy Day 2011

On May 11th, although the RET were having a stroke, 70 stu-

dents 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 cur-

riculum 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 partner-

forum. 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 work-

load 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.


44 • FSR news

FSR Activity reportEuropean 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.

KPMGThe 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 divi-

sion. 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 out-

comes 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

HeinekenThe 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.

NIBCThe 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.

ParisOn 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-

FSR news • 45

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 com-

pany visits! Paris is a very diverse and multicultural city and

above all, a great place to spend some time!

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.

Een duurzaam ontwikkelde carrière gaat langer mee.

DB-000-adv-regulier-basis-210x297-v10.indd 5 23-12-10 15:29


FSR news • 47

FSR Activity reportYoung 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 Cor-

porate 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 com-

pany culture and anything they wanted to share with the stu-

dents.

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. 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.

Een duurzaam ontwikkelde carrière gaat langer mee.

DB-000-adv-regulier-basis-210x297-v10.indd 5 23-12-10 15:29


48 • Company presentation Flowtraders

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 head-quarters 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 him-

self as Jori Kretzers. First, he tells us about how he ended up

as a Flow Trader. “During my studies in Finance & Invest-

ments at the Rotterdam School of Management I went to a

lot of recruitment and in-house activities. One of those activ-

ities 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 commodi-

ties, and I was welcomed back here as a Junior Trader a

month later.”

Welcome to Flow TradersSo 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 Trad-

ers 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

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 per-

manent 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 YorkFor 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

Company presentation Flow TradersOutsmarting the competition

Company presentation Flowtraders • 49

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 fol-

lowing 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

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. Con-

sidering 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 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 finan-

cial 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.

Flow, a privately held financial firm, keeps pace with global

markets. Growth, by continually building its team of excep-

tional 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

[email protected]. For more information contact

Recruitment +31 20 799 6799.


50 • FSR news

FSR Activity reportFemale 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

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 par-

ticipants 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

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 cliënten. 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.

R u i m t e v o o r o n d e r n e m e n !

Eigen klanten is voor mij een uitdaging


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FSR news • 53

FSR Activity reportFinance 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 prac-

tical 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 con-

sortium of RBS, Fortis and Santander? After the enthusiastic

and inspiring presentation of Ravi the groups split up and

followed their preferred track.

Trading Track – OptiverA 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.

Banking Track – AtazarIn 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 simula-

tion. 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

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.

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 cliënten. 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.

R u i m t e v o o r o n d e r n e m e n !

Eigen klanten is voor mij een uitdaging


104028 AcconAvm 210x297f Forfaitair Df.indd 1 24-02-2010 16:53:40


54 • FSR news

FSR Activity reportInvestment 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 Invest-

ment 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


FSR news • 55

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 ware-

house. 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


56 • FSR news

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

October Big 4 CycleMeet the 4 largest accounting company’s.

International Banking CycleThe investment in your career.

November Traders TrophyCan you handle the pressure?

December Multinational DinerGet to know the leading Dutch multinationals

January Accountant Firms DayCreate your own goodwill!

February Financial Business CycleExplore the financial opportunities.

March Young Financials DinerGet to know interesting financial companies.

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

April National Investment CompetitionInvest and be a winner!

May Bachelor Accountancy DayWill you choose accountancy?

Investment Banking MasterclassLearn to valuate, like an investment banker.

Female Business TourIt might be a men’s world but it would be nothing without a

woman.

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

International Research projectKuala Lumpur & Singapore, diverse yourself.

June Ernst & Young DrinkGet to know the employees and the company.

Finance DayThe first step in your finance career.

Highlights of last year

Of heb jij een beter idee om alle facetten van de fi nanciëlewereld te ontdekken?Financial Traineeship

Financial TraineeshipVanaf september 2011

Judith Verschoor088 792 53 [email protected]

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

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

www.werkenbijpwc.nl

4543-81 PwC RC Adv. FT zonder datum FSR Forum.indd 1 2/28/11 5:46:03 PM

Blijkt de universiteitineens een vooropleiding.

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 én 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

Diederik van de ScheurConsultant TAS

Piet-Hein TouwStaff FSO

E&Y_210x297mm_potentials.indd 2 23-09-10 14:50

FSR Forum June 2011

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