Up, Up and Away?
By Lindsay Williams
21 Sep 2007 at 10:44 AM GMT-04:00
resourceinvestor.com
JOHANNESBURG (Business Day) -- The gold price is at new highs on global uncertainty, a weakening dollar, lowering U.S. interest rates and new interest from India. Classic Business Day speaks to The VM Group.
LINDSAY WILLIAMS: Two weeks ago I spoke to Jessica Cross, chief executive of The VM Group (formerly Virtual Metals), and we spoke about the gold price going through the year high of about $694 an ounce. The target for the end of the year was $700 an ounce. That target has been achieved, so well done - but how about $735 to $740 an ounce? On the line again is Jessica Cross. Jessica, what on earth has happened to this gold price?
JESSICA CROSS: I reckon there are things happening externally and internally to the market, which have come together in a cocktail of just amazing activity - it’s really feverish. I think externally what you’ve got has been this whole subprime thing, and what’s been going on with the banking sector both in the U.S. and the UK. Superimposed on that you’ve got election year in the U.S., and I think the Republicans coming from where they’re coming from are going for broke, and it has to be economic growth at all costs to the fact that they might even say a weaker dollar is fine - we will live with a weaker dollar. A weaker dollar translates into a higher U.S. dollar gold price, and then we know what happens from there.
I think on the subprime thing, the fact that the U.S. Fed has reduced interest rates is obviously extremely important. That feeds into a weaker dollar, and that then feeds into the whole commodity cycle and the boom that we’ve been talking about periodically. It’s not just gold - nickel went up 12% last Wednesday. It’s just absolutely phenomenal.
But internal to the gold market as well you’ve got a lot of money chasing a lot of feverish investment - the exchange traded funds (ETFs) are up, the open interest on the exchanges is way up on last week. The ETFs took 53 tonnes this week, which is really good. On the physical side there’s something brewing which we don’t understand yet - the Indian market has taken almost 1,000 tonnes.
LINDSAY WILLIAMS: What I don’t understand at the moment is you can talk about interest rates falling by .5% in the U.S. - and therefore that reduces the contango equation in commodities like gold - but this is not a technical play, this is gold going from $640 to $740, essentially $100 an ounce in a very short space of time. There is something brewing - it’s either a massive speculative frenzy or there is something really deep down that’s happening structurally in the gold market. Which one do you think it is?
JESSICA CROSS: I think you’ve got a combination of both. I think all the international stuff that I’ve been talking about has brought very hot and very keen money into gold. But on the physical side, I was saying that India has taken almost 1,000 tonnes this year, and we suspect that this is not just the usual kind of jewellery buying into dowries as we see year on year - which we know is about 300 to 400 tonnes in a year, and we know it’s there. This appears to be something else, and we are not entirely sure what it is yet. Whether it’s a fiscal thing internal and specific to India or what - we just do not know - but it is very unusual. On that basis we would say when we find out what it is, it’s going to be a once-off which is probably not repeated because these fiscal things tend not be repeated. But having said that, it’s been enormously supportive of the price and continues to be over and above all the other things that are going on. It’s very exciting.
LINDSAY WILLIAMS: Yes, it’s very exciting indeed. Last time we spoke, you talked about a producer de-hedging programme potentially. Did you ever find out whether that was spurious or a true rumour?
JESSICA CROSS: Absolutely. That was New Quest, and it’s in our numbers. The de-hedging continues - albeit at a slower rate. It still remains supportive of the price. That is just another thing that is feeding into a much healthier supply and demand balance. Maybe in a few weeks we will be able to tell you what is going on in India. We’re trying to find out what’s happening. It’s intriguing, and $800 now looks very doable before the end of the year.
LINDSAY WILLIAMS: Yes, it does indeed. Is there any news from the central banks that the Spanish, I understand, have finished selling their gold reserves? Is that also a factor?
JESSICA CROSS: I think it probably is. They are definitely holding back. We suspect that the EGA Group will probably just undershoot the 500-tonne mark. There again it’s good news - it’s all just feeding on itself, and the whole economic thing, interest rate thing and the weaker dollar feeds into the whole commodity cycle. |
