(COMTEX) Gold, the Warm Log Fire in a Cold, Harsh World
Johannesburg, Jan 03, 2003 (Business Day/All Africa Global Media via COMTEX) --
In a rational world, most commentators would argue, gold has no business trading
at $344 an ounce. But 2003 dawns as anything but rational.
As war clouds gather over Iraq and tension mounts on the Korean peninsula, as
interest rates in North America, Europe and Japan remain extraordinarily low and
much of the world economy looks set for stagnation, the lure of gold pulls
harder. The yellow metal is now at five-year highs on fairly heavy trading. The
key question is how long gold's run can last.
A number of well-known factors combined to cause the recent gold rally. The most
trenchant of these has been the sustained period of contraction in the industry
during the late 1990s, which forced mining companies to cut costs and scale back
exploration.
Only four years ago, AngloGold CEO Bobby Godsell was fielding questions about
what the company's strategy would be if the gold price fell below $200/oz.
Retrenchments and mine closures were the order of the day. The industry's
reconfiguration prompted a bout of hedging on the futures market as gold
companies desperately tried to keep their heads above water.
One way of looking at a hedge is to see it simply as a delaying mechanism. At
some point the real market value asserts itself as both sides of the hedges
lapse and square out.
With the gold price on the rise, hedges look unattractive and many gold miners
are unwinding their gold hedges as fast as they
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Gold represents the warm log fire in a cold, harsh world
can, which puts bullion on an upward spiral.
Gold's decline in the late 1990s was worsened by central bank sales of their
stocks of the metal. But just as the rising gold price prompts the unwinding of
hedges, so too it means central banks are holding back on their gold sales in
the hope of getting higher prices when they do sell.
The prize for the most foolish seller undoubtedly goes to the British treasury,
which managed to sell more than half its $700/oz ton gold stocks at $274/oz.
Hindsight, of course, is 20-20, but at today's prices, the sales appear to have
been a disaster, costing half the total gold underpinning the pound.
Over the past 18 months the financial and political backdrop, previously
perceived as benign, has changed, says the World Gold Council. "Gold has
increasingly attracted the attention of professional risk managers, looking for
diversification in the face of stressful investment environments," it says.
About halfway through last year dollar weakness took over as the force driving
the gold price; of late, world political tension has muscled in. The latter
factor is the most uncertain and unfathomable aspect of gold's recent rally.
Jason Goodwin, author of Greenback, a recently published book on the link
between the dollar and US history, describes the relationship between gold and
currencies thus: "Gold, the argument runs, doesn't stoop to flattery. Gold,
being tight-lipped, offers no hostages to fortune. It remembers nothing,
venerates no one. It trumpets no ideals, protests no loyalties, offers no jam
today or tomorrow, doesn't much care if a war rumbles on for years or finishes
in a triumphant blitzkrieg. Cold, old and remote, it doesn't even pay interest.
The dimmer the days, the more irrational the conflict, the brighter it gleams."
The extended interregnum between US President George Bush's stated desire for
"regime change" in Iraq and the preparation of an invasion has been good for
gold.
According to World Gold Council analyst Jill Leyland, gold is often seen as a
form of insurance. "You buy it before the event, not afterwards." Since "the
event" has not transpired, this additional support for gold has lasted longer
than anticipated.
This trajectory a boost before the action and a lull afterwards is certainly the
lesson that history has taught. In the previous Iraq war, gold shot up on the
invasion of Kuwait but declined during the Desert Storm operation.
Will history repeat itself? Most likely, say analysts.
"If gold is a magnet for our wartime fears, it is only a brief outburst of
irrationality in an irrational world, an atavistic sentiment, fleetingly
indulged," writes Goodwin.
"Gold will always be a part of the mystery of money. Just as it's good for our
souls, once in a while, to keep warm around a log fire, or settle down with a
good old-fashioned book, so gold can never disappear, because its an eternal,
disinterested witness to the tragicomedy of human history."
by Tim Cohen, Chief Reporter
Copyright Business Day. Distributed by All Africa Global Media(AllAfrica.com)
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KEYWORD: South Africa
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