BULLION AT THE MELTING POINT
Official sales could keep gold at 20-year lows
By Assif Shameen
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WHAT HAS BEEN THE worst performing asset in an Asian investor's portfolio? Not Asian bank shares or regional currency funds; those have rebounded nicely from last year's lows. No, the laggard is that old Asian favorite and traditional standby in uncertain times - gold. Bullion bought 20 years ago has lost two-thirds of its value. The same money invested in U.S. stocks would be up nearly ten-fold, not counting dividends. This year alone, gold has dropped 12% to around $250 an ounce, its lowest point in 20 years.
With a track record like that, anyone buying gold today is a sucker, right? Wrong, say a few brave bullion bulls. "Past performance is never a guarantee for the future," says Basil Burmeister, a gold analyst for HSBC Securities in Melbourne. "Sure, if I had invested in Internet companies five years ago I'd be a billionaire - but right now I'd be selling some of my Yahoo stock and buying gold." But others say the bottom is yet to come. "Will gold go to $200? Maybe," says Kamal Naqvi, a gold analyst for Macquarie Bank in London. "Will it go $150? It's possible. Who knows - it could could go even lower." What is going on with the "precious" metal?
<Picture>Gold's latest woes began earlier this year when the Bank of England said it planned to trim its gold holdings by - brace yourself - 100 tons. (It has so far sold 25 tons, and still has 715 tons on hand.) And Britain is not the only elephant trampling the market. Switzerland plans to reduce the 2,590 tons in its vaults, and the International Monetary Fund (IMF) may sell as much as 10% of its 3,217 tons to fund a plan that will cut the debt burden of the world's poorest nations. Now look at supply and demand. The world's gold mines - mainly in Australia, Canada and South Africa - produce some 2,500 tons per year. Demand from jewelers and investors is about 2,600 tons. The production shortfall ought to support the metal's price. But the world's central banks hold some 34,500 tons, and with more of them expected to follow London's lead, prices are not about to rise.
Why have central bankers turned sour on gold? Besides being a lousy investment, the yellow metal has become a quaint anachronism in the increasingly sophisticated and globalized financial system. "Central banks would rather hold yen or dollars or euros or [U.S.] treasury bills instead of gold," says Naqvi. And private buyers are not taking up the slack. "In any other commodity, when prices fall so far so fast, there will be people out there buying, hoarding the stuff - but not gold," says the Macquarie Bank analyst. "Even though Asian econ-omies are turning around, we are seeing no pick up at all in demand in China, in Japan, Hong Kong, Korea or for that matter anywhere in Asia." And Asian demand is crucial. Chinese and South Asian buyers account for nearly 80% of total demand each year.
As the price drops, production should fall until gold becomes scarce, leading to a rebound. But don't count on that happening anytime soon. Warren Edney, a gold analyst for ABN Amro in Sydney, reckons that the average production cost of existing gold mines is $215 per ounce. While some mines will close if bullion goes below that, others will have sold their production two or three years in advance at a better price, and will stay open. Moreover, lower gold prices are likely to weaken the currencies of gold-producing countries and so lower their U.S.-dollar break-even points, allowing them to keep digging up the metal.
Gold miners are up in arms over the official gold sales and the consequent low prices. The World Gold Council says the planned IMF sales will hurt the very debtor nations it wants to help by slashing mining jobs and exports. Pushed by African producing nations, a conference of 71 developing countries last month called for a moratorium on official gold sales, pending study of a "central mechanism" to permit orderly disposals. And some U.S. congressmen are moving to block the IMF from selling its gold.
Therein lies the hope of bullion bulls. "What you need is an agreement among [big central banks] to scale down or phase out the sale from their vaults," says HSBC's Burmeister. "As soon as you have that, sentiment will turn and prices will go up pretty quickly. Moreover, if such a move comes after a few increases in U.S. interest rates and more signs of inflation, gold could really take off again."
But after a 20-year bear market, gold no longer figures on many investors' radar screens. Gold-bar sales in Hong Kong and Singapore have fallen substantially. Naqvi says the big question is how long will it take for low prices to disillusion people who are steeped in the tradition of holding gold. "At some point, attitudes will change in India and China," he says. "When that happens, a chunk of demand will be taken away from the equation."
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