Gold is likely to remain a good buy
Martin Spring
THE ONE rule for successful investment that I've found usually works is to buy or sell when market sentiment is at an extreme.
When everyone, or almost everyone, tells you an investment is a dud, that is almost certainly the time to put your money into it.
Gold recently confirmed this rule in spectacular fashion. In the first half of this year the world's gold mining companies were so negative about the outlook for their product that they speculated against it on a massive scale.
They borrowed more than 250 tons from central banks to sell in excess of their own production, or six times as much as in the first half of 1998.
Trouble is, such hedging is a self-fulfilling process as it helps to drive down the price of gold.
At first it looked as if the mines were clever. When the Bank of England foolishly announced its intention of selling more than half its gold reserves in a series of public auctions over several years, the price of the yellow metal plunged to less than 253 an ounce in July.
Pessimism was universal. But I sensed that it was a market bottom, and wrote a bullish column in BT Money that must have looked foolish to many at the time, concluding thus: "In the short term, anyway, gold shares and unit trusts look like a speculative buy".
Since then the gold price has risen by a quarter and the JSE gold share index has soared more than 70%.
What triggered the dramatic reversal in market sentiment was an announcement by 15 European central banks that they would limit their sales of gold. The decision that captured the headlines was that the banks would limit their sales to 2 000 tons over the next five years.
Most of the sales will be accounted for by previously announced plans - 1 300 tons by Switzerland and 375 by Britain, leaving only 325 tons to come from the 13 other central banks.
This was not as much of a surprise as it might have seemed, as three European central banks, those of Germany, France and Italy, with the US, together hold more than half the world's central bank stocks of gold, and those four have always made it plain that they don't intend to sell bullion.
The real surprise was that the European central banks said they would no longer provide any extra bullion for the hedging market.
Everyone involved in the gold market could immediately see the consequences: The supply of gold from all sources is likely to be less, with one source of supply - European central bank loans to hedgers - no longer available. With less bullion available to hedgers, the cost of borrowing gold to sell forward is going to be higher. Producers who want to hedge forward and speculators who have been pursuing a similar strategy in expectation of profits from a falling gold price are faced with having to pay more.
It looks as if fundamentals in the market have at last changed.
Gold prices are likely to trend upwards for the foreseeable future.
? Martin Spring is editor of Personal Finance Newsletter
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