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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: baystock who wrote (36979)	7/11/1999 6:00:00 AM
From: Alex	Respond to of 116790

Why gold is still a good buy GOLD has a special place in South Africans' thinking. The yellow metal is somehow a symbol of our national wellbeing going far beyond its continuing (but declining) importance as an earner of foreign exchange and provider of jobs. At present that symbol is looking decidedly tarnished, with its price in dollars at its lowest in 20 years and central banks seemingly anxious to dump the stuff. Is gold finished? I don't think so. Central bank sales are nothing new. Over the past decade the official sector has unloaded 6 700 tons of gold in various ways. Recent announcements of projected future sales have spooked the market - 1 900 tons in all from Switzerland, Britain and the International Monetary Fund will be sold off. Taken together, these announced sales are unlikely to amount, averaged over the next few years, to more than half what central banks have in any case been supplying in past years. And, as George Milling-Stanley of the World Gold Council has pointed out, the four countries that collectively account for more than half the gold held by the official sector - the US, Germany, France and Italy - have intimated that they have no intention of selling any. It is true that gold no longer has its traditional appeal as a vehicle for preserving wealth against the ravages of inflation or of political or financial disaster. In the world economy as a whole, inflation is either dead or deep in slumber (according to what you believe). And when disaster threatens, as it did last year when the huge New York hedge fund Long Term Capital Management collapsed, investors flee to the safety, not of bullion bars, but US Treasury securities. Mining companies have added to the despondency by hedging, which amounts to selling now at today's prices gold borrowed from the banks, with the idea that they'll be able to repay with metal mined in future, when prices will be even lower. You can't blame the producers for seeking to insure against such lower prices, but obviously the extra gold that hedging puts on to the market - averaging more than 300 tons annually in recent years - adds to the pressure pushing down prices, and helps make the strategy self-fulfilling. Against such a gloomy background, how can I possibly retain any element of optimism? First, because of the increasing gap between demand for and supply of gold. In 1997 and 1998 the deficit averaged more than 1 650 tons a year. It has been growing, and it's likely to continue to do so as the world's gold mines struggle to survive on low prices, while those prices in turn encourage gold consumption. The deficit is being met by recycling of scrap, central bank disposals and hedging - but the bigger it grows, the more unsound the fundamental supply/demand situation will be. Over the past 10 years mining companies have sold forward more than 2 000 tons of gold that they haven't yet produced. That bullion will have to be repaid at some stage. And it already amounts to almost a full year's world mine production. "Mind the gap" as they say on the London Underground - at some stage some surprise event is likely suddenly to push up the gold price enough to frighten some of those who have been willing sellers (probably the hedgers) into withholding some of their supplies. The gold price will be hit with a double whammy: some gold supply will be withheld, some more will be diverted to repaying metal borrowed for hedging and derivative purposes. The gold price could take off like a rocket. And speculators will provide an additional boost. Recently speculation has been pushing down the price. Robert Guy, a leading figure in the London gold market, has commented: "A large short speculative bubble has inflated greatly in recent weeks." Speculation has been depressing the gold price further than the balance of other forces of supply and demand would have done. But when a market turns, speculators rush to close out their positions to lock in profits that they have and/or limit the losses they face. And to establish new speculative positions to profit from a rising price. Kevin Crisp, a precious metals strategist with investment bankers JP Morgan, says we could see short-term fluctuations of as much as $100 or even $150 an ounce within periods as short as a few months. In other words, gold could become a speculator's heaven - or hell. And give investors, with their more stable long-term strategies, heart attacks. Even a price jump as little as $30 an ounce would double the profitability of South African mines. The other important thing to remember about gold is that, contrary to the impression you might get from published comments, it is not in a bear market - for South Africans. Although the dollar price of gold is important, as we South Africans invest in rands, so the rand price is much more important. Management restructuring and less extreme attitudes by labour leaders have placed our gold mines on a sounder commercial footing, and their shares are not expensive. These factors suggest gold shares or unit trusts still have a role to play in any balanced investment portfolio. And you can't totally ignore the yellow metal itself, given the inherent long-term risks to social stability in our country. Follow the example of Chinese minorities in Southeast Asia and keep a small hidden store of "chaos money" - Kruger rands or sovereigns. Keeping 3% to 5% of your wealth in gold assets of various kinds makes sense. By adding balance to your personal investment portfolio, it lowers overall risk. In the short-term, anyway, gold shares and trust units look like a speculative buy. • Martin Spring is editor of Personal Finance newsletter btimes.co.za