Very very interesting gold reading:
"This year, investors will re-invent the power of gold as a reserve currency"
by Tom Peeters, Financieel Economische Tijd (Belgian version of "The Times")
Now, nobody seems to be interested in gold. On January 10, the POG went under the
280 $ level. In the beginning of the 80's, one ounce of gold was selling for 850 $ !
What is more, gold was during the past 10 years the worst investment possible.
Someone who bought in 1987 10.000 $ in a fund, invested in 500 S&P companies,
would have now more than 40.00 $. But someone who bought gold instead, has now
less than 6.500 $...
Gold has lost its attraction and is now being treated as an ordinary commodity, just like
copper, coffee or lead.
The big fall in the POG does not seem to be very logical. When we look at demand
and supply, we can only conclude that it looks very favorable for goldbugs. The
demand is now at a record level. Gold Fields Mineral Services calculated that last
year, the total demand for gold rose by 16 %. The engine behind this increase, was the
demand for juwelery, which increased by 15 %. Especially India, the Middle-East and
Europe showed brisk demand. On the supply side, output from goldmines rose by only
2.3 %. In addition, the biggest South-African goldminegroups announced big
restructurings. These should lead to cost reductions and should boost growth within
and outside the country. We saw a merger between Golds of South Africa and
Gengold. With a yearproduction of more than 130 tonnes is Goldco the second biggest
goldmining company in the world. And Anglo American has put all his holdings into
Anglogold and is now the biggest goldproducer in the world. This wave of mergers
should normally have been very positive for the price of goldmining shares. However,
the opposite was true...
De POG has decreased every year, with the exception of february '96, when it
reached a peak of 417 $/ounce. Last year, there was also the Bre-X saga, which had
a devastating influence on the POG. In addition, the issue about Nazi gold was also a
negative factor. It is obvious that a number of Swiss banks have gold in their deposits,
which has been taken (stolen) from Judish people during the worldwar II. When this
gold would find its way to the free market, the this could cause again a negative effect
on the POG.
But there is more. Golddealers fear that central banks will sell in the short term a large
piece of their gold holdings. This would have very negative effects on the POG, since
they are holding 35.000 tonnes or 30 % of the total volume of gold which has ever
been produced ! Due to this, goldproducers started to sell forward a large portion of
their gold deposits. This caused the POG to go down. In addition, speculative funds
also sold a lot of their gold deposits. Also, it looks like a new generation of central
bankers has born who are backing away from the gold standard. Examples are : sales
of the bank of Argentina in december '97 of 124 tonnes of gold, their entire gold
deposit. Instead, they bought American bonds, which had a yield of 5 % and which
give an annual return of 275 mio $.
These sales of central banks undermine the position of gold as a reservevalue within the
financial system. On the first view, this means that the future of the goldmining industry
looks very bleak. But we can give 2 important remarks on this.
The first one is, that sales of central banks are not new. The 393 tonnes of gold which
has been sold last year, was more than double of the average of the past 10 years. But
much less than the 622 tonnes sold in 1992 and the 484 tonnes sold in 1993. But there
is an important difference with the past. When in the past investors reacted on the news
of effective sales, now they react on sales rumours. Such a roumur was the
announcement last year by the Swiss parliament commission, that it would be better to
sell half of the total gold deposit of the central bank.
But a number of analists do not think that central banks will now start to sell all their
gold deposits. It is true that a number of European central banks anticipated the
upcoming Euro and sold a part of their goldholdings. In March '96, Belgium sold 203
tonnes and in January '97, Holland sold 300 tonnes of gold. Australia sold in the
middle of last year 167 tonnes of gold.
But according to goldanalist Frank Veneroso, these are exceptional transactions for a
unique happening. By the beginning of May '98, these kind of operations will be
finished. At that time, it will be decided which countries will be part of the EURO. This
date is a date which will stimulate the official sales of gold, but marks at the same time
the end of these sales. In a recent study by Williams de Br”e, a wave of sales by
central bankers will by highly unlikely. When in 1975 the USA sold 530 tonnes and the
IMF sold 1.600 tonnes between 1976 and 1980, the POG reached a low of 280
$/ounce. But this did not prevent the POG to go up again as high as 850 $/ounce. This
study concluded, that the level of goldreserves by the European Central Bank will be
highly influenced by the Geman Bundesbank. And they are in favour of a large
goldreserve, backing the EURO.
David Scully, economist at Price Waterhouse, is referring to what happened in the end
if the seventies, to explain the future high demand for gold. The sales of the USA and
the IMF were the reason for the jump in the POG above the 800 $ level. It is true that
sales had a negative effect on the POG, but institutional investors and financial
institutions entered back into the goldmarket soon afterwards. Their reasoning was as
follows : when the USA will not support their dolllars with gold, then it might be a good
idea that private investors will take care themselves for this support...
Exactly this link between the dollar and its support (gold), is now causing a lot of
problems with many economists. This is the second remark in the discussion on the
waning role of gold as being a reservevalue.
It might well be that the financial crisis in South-East Asia will be the reason why the
dollar, the world's biggest reserve currency, has in fact no backing anymore and that
gold will become again the most important reserve currency.
In the short time, this crisis will have a negative effect on the POG, because of the
depreciation of the Asian currencies. But in the longer term, the opposite will be the
case. The weakness of the financial system, which was backed by the US dollar, will
be apparent.
The Canadian economist Maison Placements arguments that the US dollar has
currently little backing by gold, because the USA has during the past decade printed a
lot of 'paper dollars', in order to provide the world with enough dollars. After every
crisis situation, the USA started to print a lot of extra dollars. This was also the case
during the Asian crisis. But when the EURO will be a fact, a new strong international
currency will be created and with the appreciation of the yen, the demand for dollars
will decrease. And when the Asian countries and whith them other countries will start
to doubt about the real strenght of the dollar and will realize that the greenback has
nearly no goldbacking, it could be quite possible that the yellow metal will re-arise as
the most important reservecurrency. And this just at a time when central bankers
would like to abandon the gold standard.
The analysts of Maison Placements and Frank Veneroso think that the dollar bublle
will burst in 1998. The POG in dollar terms will increase dramatically, due to the
coming weakness of the dollar itself. So it seems that gold will still have a future. The
days of gold being a reservecurrency do not seem to be over yet... When the rules of
free markets between demand and supply of gold will be respected, we could be in for
a dramatic surge of the yellow metal... |
