Is Gold Losing the Midas Touch
By Simon Johnson
STOCKHOLM (Reuters) - Gold is no longer the metal of choice for the adornment of the ruling class.
Rappers, hip-hop artists and youngsters copying their pop icons are gold's new poster-children and the move downmarket could hurt the gold price in the longer term, according to analyst Jessica Cross.
Cross told a recent metals conference in Sweden that her firm, Virtual Metals, had forecast that gold would stand at about $450 an ounce at the end of 2004.
"After that the fundamentals look a little bit more concerning."
Gold started trading at around $437.00 a troy ounce when trading resumed after the Christmas and New Year holiday. On Tuesday (Jan.11) it was around $422 an ounce.
Cross believes that gold jewelry is losing its gilt-edged status.
Quoting from a British Web Site, she defined the modern British jewelry lover as someone who drapes their body with "hunks of worthless 9 carat gold crap."
British "chavs" -- new slang for the urban underclass -- and their "bling-bling" and hip-hop U.S. cousins buy high-fashion brands of clothes but bargain basement pendants and rings.
This is putting off the traditional -- and wealthy -- gold buyer, according to Cross.
Some might call this snobbery but there are signs that demand for gold jewelry, which makes up around 80 percent of annual demand for gold, is waning.
Over the last five years gold "as a proportion of retail expenditure has been losing share," said Philip Olden, managing director of international marketing at the World Gold Council.
In September last year, the Council launched a 10 million pound ($18.76 million) advertising campaign called "Speak Gold" to address the problem.
ALL THAT GLITTERS
While pop fashion icons have only a limited effect on the longer-term price of gold, there are other reasons to think it may fall.
Central banks -- which hold big chunks of the world's 150,000 tons of gold -- are sellers. Under the second European Central Bank Gold Sales Agreement which runs to 2009, the banks have said they will sell 2,500 tons of their reserves over the period.
This could depress the price of gold, Cross said, although the agreement exists to counteract volatility from unexpected sales.
Hopes that China will buy to diversify its foreign reserves are misguided, she added. The market is too illiquid.
Pessimism is not universal. War in Iraq (news - web sites), continued political uncertainty and worries about the stock market are good reasons for investors to seek a safe haven for their assets.
More recently gold has been boosted by a slump in the dollar on worries about the U.S. current account and budget deficits.
Gold has risen by nearly 60 percent since the start of 2001 and many investors don't see its rally ending any time soon.
"Gold is going to go up 2-4 percent per year," said Ken Gerbino, fund manager of the Kenneth J. Gerbino Company.
Over the next 10 years the price will rise to around $625 an ounce, Gerbino, who runs a $3 million fund which invests in gold-related stocks told Reuters at the Stockholm conference.
The dollar will be a key factor in whether gold can maintain its momentum. Faced with a long-term decline in the greenback, Europe is likely to pump money into its economy making gold an attractive inflation hedge.
"The dollar is going to hell in a hand basket," Gerbino said. "There is a global syndrome to follow the U.S. into deficits and more paper money and this is going to create a huge amount of inflation down the street."
Gold is also becoming an traded asset class to rank with equities, bonds and real estate, according to some analysts.
The launch of a traded fund in the U.S. in November attracted $1.3 billion of investors' cash in just three days. Each share is backed by one tenth of an ounce of physical gold.
The World Gold Council does not comment on future gold prices, but its latest figures support the idea that gold also retains its glitter for many.
Third quarter figures for last year show consumer demand for gold up 6 percent from the same period in 2003 in tonnage terms, for a year-to-date rise of 8 percent.
"The fundamentals of gold jewelry demand is still strong," said the Council's Olden.
Neither is gold's new ghetto-chic status a cause for concern. "Even when gold jewelry is used by a particular group like the bling-bling culture in the U.S., it is actually a positive dynamic for the market," Olden said.
"I would rather it were embraced by the youth culture than that it were perceived as by people as old-fashioned."
($1=.5330 Pound)
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