Gold's promise draws dreamers, schemers and sceptics
James Kirby
February 22, 2009
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THERE'S always money to be made somewhere: just now that "somewhere" is in gold.
Gold prices have been rising for months. But until very recently investors have been understandably sceptical. The gold sector is uniquely loaded with schemers and dreamers. Still, with price records being broken, suddenly everyone's paying attention.
In the space of a few months, gold prices have soared from under $US1000 to strike $US1524 at one stage last week.
On the back of that powerful price surge mines are reopening, new jobs are appearing across the sector and the Perth Mint (the government-owned gold factory) is so busy the director, Nigel Moffatt, has revealed the mint has put on extra shifts for its workers.
But it takes time for news like this to flow through the market. Only in recent weeks as the big gold miners — even perennial disappointments such as Lihir Gold — have reported very strong results have the facts struck home.
What happened? Well, the answer is rarely simple when it comes to gold because you have to view it as both a metal and as a "safe" currency.
Essentially as stockmarkets continue to flounder — the ASX has been in decline since November 2007 while Wall Street is retesting record lows — investors believe gold is a "hedge" against uncertainty.
Though many factors are driving gold prices — lower fuel costs, a lower Australian dollar (against the US, where prices are set) — the main force behind higher gold prices is fear that the financial crisis will be either deeper than we think, or will trigger a new round of inflation. At worst, there are fears it could do both.
Will the gold price keep going up? Unfortunately, even by the woeful standards of commodity forecasting, gold price forecasts are exceptionally unreliable. But for what it's worth the report that has really got the market buzzing is from Merrill Lynch. The New York investment bank may not be the power it once was, but a major report from the broker can still cause a buzz: Merrill Lynch says that gold can lift another 50 per cent; Merrill Lunch suggests it can go from about $US975 today to $US1500 in 12 to 15 months. Continued...
The forecast is remarkable and hits the trading rooms just as gold makes a return to centre stage in the wake of inflationary stimulus packages being launched in almost every Western economy.
As Rod Hanson, the managing director at Bendigo Gold, explains: "There's a historic tradition of investors moving into gold at times of great uncertainty … this time it seemed to be a while coming, but now it has really kicked in."
Gold fever has now "kicked" in to the degree that mines recently facing a crisis are being reinvented. St Barbara, one of the biggest local miners, suffered a sell-off last year as gold prices temporarily drifted and the deep mine shaft the company required used up too much fuel. With oil prices at less than a third of their peak in 2008, St Barbara is back in business with a rising stock price. Meanwhile, Kagara, best known as a zinc company, says it will list its gold assets in a separate company on the ASX.
Brokers believe it's only a matter of time before we get new gold floats. Remember this is in a market where nobody is "spinning off assets" and nobody at all is talking about new stockmarket floats. The ASX "upcoming floats calendar", which until this year was always filled with dozens of applications, has a paltry three floats representing a grand total of $16 million.
Nobody knows if gold can keep going up … including Merrill Lynch. In fact, it lost a little ground over the past few days. But two factors stand out: gold prices are now so high they can fall — a lot — and gold miners can still make handsome profits. A strong gold price can be sustained by uncertainty in the markets, and these are the most uncertain markets in a generation.
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