Speculation about the mettle of gold investors
Australian Financial Review July 11/97
By Barrie Dunstan
Not for the first time, Australian gold miners are near the
eye of a storm over the Reserve Bank's sale of
two-thirds of the nation's gold reserves and investors will
need to tread cautiously, even if their instincts say the
bear market can't last forever.
Also not for the first time, the industry finds itself largely
isolated; there has been general support for the RBA's
sale and the ending of a long-standing practice of holding
gold reserves.
Investors will probably have to get used to fallout from a
continuing political campaign by the gold miners, largely
from WA where flow-on effects could cause mine
closures and turn some centres back into ghost towns.
Those with a speculative eye for gold shares will be
looking for bargains or for a turning point in the sell-down
of gold shares which, up to last night, had taken the gold
index down almost 33 per cent this year.
The daily world price of gold now probably depends on
an unwinding of the short positions of many powerful
players. These may include other central banks
contemplating similar sales who were beaten to the punch
by the smaller RBA.
Is the RBA right? Has it sold before a further sharp fall in
gold prices? Brisbane broker Morgans' chief economist,
Michael Knox, thinks not. His analysis suggests this may
be a time to make money by betting against the RBA's
price expectations for gold.
But until gold prices do recover substantially, it is hard to
find too many reasons to invest (as distinct from
speculate) in gold shares.
The Australian gold miners need about $400
million-$500 million a year to fund exploration to keep
operating. This usually comes from cash flows of existing
companies or from the capital markets via new share
issues or gold funds and gold loans.
The Government's sale of gold has scuppered the gold
price for the present; in this climate it is hard to see how
any miner, let alone hopeful explorer, could raise money,
even if they were sitting on top of Lasseter's Reef.
Speculators might not mind if the combined effects of all
this drives down the valuations of Australian gold mines
and leaves them open to acquisition and raids by world
groups, notably the North American miners. But the
gold-mining industry is still trying to come to terms with
the effect the gold sales have on such a major export
industry and one which, in WA, is faced with new
royalties on top of concerns about native title.
Presumably, the Federal Government and the RBA were
aware of the effect the announcement might have on
markets, though there are people in the gold industry who
suspect the Treasurer Mr Costello (who has said he did
know of the plan) didn't appreciate the significance of the
move.
World gold experts are now saying the reason the
Australian sale has been taken so badly by the gold
market is that Australia is the first central bank to
acknowledge that it has sold gold primarily for rate of
return reasons -- that is, for narrow financial
considerations.
Certainly, the industry gives little credibility to some of the
subsequent arguments which have been given to justify
the sales.
Gold miners tend to believe gold does still have a place in
the world's financial system as a store of value in
uncertain or inflationary times, even though most
economic rationalists now dispute this theory and are
doubtful if nasty inflation will reappear in the near future.
But a couple of points in gold's favour, the gold miners
argue, is that Federal Reserve chairman Allan Greenspan
has disclosed he uses gold as a lead indicator in
determining inflation in the US and that gold will also be a
component in the basket of currencies which will back
the Euro.
The industry has been dismissive of the RBA's claims that
it is simply swapping above-ground gold for
below-ground reserves of gold. Does the RBA know
ways of mining gold more cheaply than current prices? If
it does, many gold miners whose costs of mining exceed
the spot price would love to find out how. Because, as
prices fall, potential, mineable reserves tend to disappear.
The RBA and the Federal Government may argue they
are looking at the bigger, economic picture. But it could
be a risky strategy to raise a question mark over the
major export revenue stream from gold as the Australian
currency is looking shaky.
Then again, with the economy sluggish and
unemployment stuck above 8 per cent, perhaps the
policy makers aren't too concerned about the $A; a slight
depreciation might be a useful part of stimulation, with a
further cut in interest rates. That's as long as the RBA
thinks it can manage all this. While inflation is so low and
the labour market so cowed, it might have a reasonable
chance.
But, as reactions to the gold sales have shown, there are
strong forces at work in international markets which are
more interested in profiting from chaos than in maintaining
the status quo in gold prices, shares or even in currencies. |
