US fears set stage for gold revival
By Tim Blue
27dec00
ANALYSTS predict the gold price will increase next year, as concerns grow over the slowdown of the US economy, a weaker US dollar and higher inflation rates driven by oil price hikes.
Brokers ABN-Amro Morgans say gold traditionally outperforms in periods of market uncertainty and high inflation.
"Volatility has been a feature of world equity markets over the past few weeks and, consequently, we have seen the beginnings of a recovery in the gold price," the company said.
Gold Council chief executive Greg Barns says there is a long-standing link between a weaker US dollar and higher gold prices; it can be measured as a 90 per cent statistical correlation.
"There will be a continuing dampening effect on the gold price as a result of continued supply into the market by central banks, but market nervousness is likely to see prices tick up," Mr Barns said.
For the next 12 months, Salomon Smith Barney predicts the gold price will reach $US325. BNP Paribas forecasts $US290, Ord Minnett $US280, and Rothschilds $US295.
Given the devaluation of the Australian dollar, the gold price in Australian dollar terms is around $80 higher than at this time last year.
Australian gold producers have reduced the size of their hedge books for the past three quarters.
Mr Barns said hedging was expected to continue to contract into next year.
"This is good news for shareholders as producers take advantage of a higher gold price," he said.
"It should be noted, however, that without hedging, the good profits that many producers have made this year would be wiped out."
Supply and demand of gold remains one of the more elusive questions in world commodity markets, but the Gold Council expects fabrication demand to remain strong and to increase next year, given fashion trends in the US and Europe towards a return to gold.
Jewellery demand is up 1 per cent on 1999 figures (for the first nine months of this year, it was 2114 tonnes) and investment demand is down 27 per cent – the latter figure influenced by the Y2K scare that pushed up purchases.
On the supply side, central bank activity and bullion leasing remain depressing influences, which the Gold Council expects to continue in 2001.
"But these influences may be offset by a physical gold market which is showing an increasing deficit between demand and supply," Mr Barns said.
One development that may affect markets in 2001 is the arrival of a deregulated Chinese gold market.
Chinese authorities have announced they will deregulate the nation's gold market next year.
The Gold Council believes individuals and traders will be allowed to buy and sell gold in a free market and will substantially reduce the existing role of the Peoples' Bank of China in its current control over the market.
"The potential impact on demand is large, given the strong cultural, fashion and investment links to gold in that country," Mr Barns said.
China will establish a gold exchange in Shanghai next year.
While investors have turned to gold in bad times, it is no longer the only investment instrument available. Government bonds are a big rival.
An issue for gold producers in 2001 will be the extent to which they can continue to adapt to the need to market their product at the investment and consumer end.
As an investment, gold could return as an attractive option. According to Mr Barns, if economic difficulties result in a higher gold price in 2001, then we are likely to see investors diversify their portfolios again to ensure they have at least a small gold holding.
In picking stocks to watch, ABN-Amro Morgans cites Lihir as offering the greatest price leverage, given its large deposit.
"The Australian market has also favoured Newcrest and Goldfields," it says. "For those less certain of the timing of the recovery, Normandy and Sons of Gwalia offer a good yield.
"Political concerns have clouded the share price of Delta Gold, Ranger and Aurora, and at the lower end, Gympie Gold also looks cheap on fundamentals."
theaustralian.com.au |
