GOLD BULL IMMINENT?
By Amanda Lang
Financial Post
NEW YORK -- If only gold behaved like other
commodities, one could reasonably expect the price of
bullion to rise.
Two separate industry groups this week painted a
portrait of wonderful conditions for producers: rising
demand coinciding with falling production.
According to the World Gold Council, demand for gold
climbed 16 percent in second quarter, a record for any
three-month period.
Meanwhile, the Gold Institute, a Washington industry
group, said production of gold worldwide will decline
this year for the first time in 20 years and be flat
for the next four years.
That should produce a price increase. For gold bugs,
who have watched the yellow metal slide in price from
$420 an ounce in 1996 to around $260 now (all in U.S.
dollars), such a demand increase appears as manna.
One signal of that dissonance is clear from the concern
around central bank gold sales, said John Lutley,
president of the Gold Institute. Central bank sales
have captured headlines worldwide in recent years, but
sales by banks were actually lower last year than, for
instance, in 1996. And without those sales, the world
would have faced a gold shortage last year.
"Demand for gold far exceeds mine production," said Mr.
Lutley, with the difference made up by recycling or
scrap and central bank sales.
The problem, said John Ing, president of Maison
Placements Canada Inc. in Toronto, is that while the
paper market obscures the true picture of supply and
demand, it could also represent a pending threat.
Producers, led by Toronto-based Barrick Gold Corp.,
have learned to hedge their production output. In
Barrick's case, it has sold forward about four years'
worth of production, meaning it has sold at current
prices gold it won't mine for years.
Hedging allows mining companies to offset production
costs while locking in current prices, in the event
bullion prices fall. It didn't take long for savvy
investment bankers to realize they could borrow the
gold for these hedging programs from central banks,
which offered low lending rates. By borrowing at, say,
1.5 percent, bullion banks such as Goldman Sachs could
then invest the capital in treasuries yielding 4
percent, and pocket the difference.
That "gold carry" is, like the yen carry used by hedge
fund Long-Term Capital Management, a bet on "spreads."
This is fine in a static environment. But as the world
learned when Long Term's yen bet turned sour, the world
can be volatile.
A similar change in spreads on the gold carry would
wreak havoc that could make LTCM -- which threatened
the financial system down last year -- seem a minor
incident, Mr. Ing said.
Goldman recently bought 4,700 futures contracts for
bullion, Mr. Ing noted, which could be a sign the bank
wants to get its hands on some actual gold.
"The paper market has flooded the physical market for
gold," Mr. Ing said, "which is why we are close to a
20-year low."
Ultimately, the fundamentals for gold are bullish,
experts said. While lowered production -- largely a
result of cost-cutting driven by the low price of their
product -- isn't the best scenario for mining
companies' long-term results, higher prices might help
gold companies jump back into exploration in a hurry.
Meanwhile, the huge short position on gold could get
squeezed out of the market as fundamentals force the
price upward, analysts said.
"These guys are sheep, when one moves, they all do,"
said Mr. Lutley. Any weakening in the U.S. dollar would
be good news for gold.
And, he added, investors may have new-found interest in
gold if stock markets fall sharply.
It is just a matter of time before gold will emerge roaring from its 20-year decline. Just like the CRB Commodity Index which is heavily weighted in agricultual food products. Gold is no more a "barbarous relic" than is food - that is to say the CRB Index which just a couple of weeks ago was groveling at 23-YEAR LOWS.
And gold's upward move will be ELECTRIFYING. Needless to say that as the bullion roars out of the chute, gold and silver stocks will literally soar - due to its extreme leverage. Historically, precious metals stocks appreciate 3 to 5 times more than the bullion.
Conceivably, the so-called Day-Traders and e-Traders will help propel gold and silver stocks into the ionesphere as they abandon the internet '.com' companies.
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