GOLD: Measuring the metal in a state of flux - Financial Times, Saturday July 10
A disproportionate fuss has been made about the UK
central bank's gold auction and the complex commodity's
fall of 10.5% in price this year, says Gillian O'Connor
On Tuesday, the Bank of England, the UK central bank,
sold 25 tonnes of gold at close to the market price:
about the quantity the South African miners ship in a
fortnight. So far this year, the price of gold has fallen
from $288 to around $258 an ounce: a drop of 10.5 per
cent.
Over the same period, the euro has fallen by almost 13
per cent against the dollar. Or look at the FTSE 100
share index, that bulwark of solid investment. Since the
start of this year, 13 of the 100 index companies have
fallen by more than 10.5 per cent. There has, however,
been no wave of popular outrage.
There are several reasons why a disproportionate fuss
has been made about the gold auction and the price fall.
The metal's changing role has created real uncertainty
about where the price is likely to end up. The Bank's
auction has been a convenient whipping boy and the
pro-gold lobbyists have become unusually vocal and
aggressive.
Gold is a metal in transition: it no longer has an official
role as money, but is not yet a simple commodity. Like
most fundamental changes, this one is creating a lot of
uncertainty, price volatility and worry. It could take
several years before a new landscape emerges.
The beginning of the end of gold as money occurred in
stages. Until 1968, the official price was pegged at $35
an ounce. Then came a brief two-tier market which
collapsed along with the Bretton Woods system of fixed
exchange rates.
In 1975, the US allowed its citizens to own gold.
Governments and central banks, which had been big
buyers of gold, became sellers. The metal was allowed
to find its own price level, and speculative investment
funds have become important players in the market.
At present, demand exceeds annual mine production,
but there is so much of the stuff already above ground
(mainly in jewellery, central bank vaults and private
hoards) that normal supply/demand sums are
inappropriate.
In the late 1970s, the bullion price surged, reaching a
peak of $850 an ounce in 1980 thanks to pent-up
demand, several currency crises, wars and near-wars,
and other events that made the yellow metal look a safe
haven.
Against that background, all that the IMF and US gold
auctions did was to stop the price rising even higher.
It has been a more sober story thereafter. Recently,
neither the collapse of large parts of Asia nor that of
Long Term Capital Management, the hedge fund
manager, provoked so much as a blip.
Miners have tended to blame the falling price on the
series of sales by central banks, and the fear of more to
come. Some analysts point out that the growth in
holdings of other types of investment, including
derivatives, has simply marginalised gold.
Nowadays, most gold miners hedge against metal price
falls by selling forward. They have also shown a generic
reluctance to curb production in the face of falling prices,
partly because some types of mine are difficult to
operate on a stop-go basis and partly because hedging
operations - and, in many cases, a weak currency - have
cushioned the impact of the price fall.
This year, the Bank of England's pre-announced auctions
have given the industry a handy scapegoat. Britain is not
a big gold-owner: it scrapes into the top 10 just ahead of
Portugal. Its planned disposal of 415 tonnes in total over
the next few years is substantially less than the 1,300
tonnes Switzerland plans to sell.
The main reason this rather small auction received so
much publicity was the unusual amount of high-profile
opposition. The World Gold Council, a lobby group
funded by some of the large gold mining companies, has
attacked both the UK sale and the IMF's planned
disposal of 300 tonnes.
Several African politicians have accused the UK and IMF
of damaging their economies and putting miners out of
work. The only lobby group that has remained
reasonably level-headed is the Australian Gold Council,
which emphasised the puny dimensions of the Bank
sale.
The effect could well be to scare any remaining investors
out of gold. But even contrary thinkers will have to search
hard to find any positive reason for buying gold now.
There will always be buyers for gold at some level.
However, the metal has been in a bear market for at
least the past four years; some would argue that the real
down-wave began in 1980.
Short term, even many of gold's friends agree that, if it
makes any decisive move, it is more likely to be down
than up. Longer term, it is not at all clear at what level
the price will find a new equilibrium. |
