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

To: grampa who wrote (42600)	10/10/1999 2:29:00 PM
From: Alex	Respond to of 116764

Gold rush not a flash in the pan Colen Garrow Market Eye IN 1979 gold was 210 an ounce, rose to 850 in 1981, and then plunged to 300 a year later. The question I ask myself is whether the rally we have seen in the yellow precious metal in the past two weeks is any different from previous ones into which gold producers scrambled to sell their production forward? What intrigues me about the recent advance is that I am hearing the old clich‚ about gold being a hedge against inflation more and more. Herein lies the reason why the dollar, and not gold, had gained favour for its safe haven status in the past few years. Investors felt more comfortable holding dollars when the interest income on these holdings were not eroded by inflation. Gold, on the other hand, gave no similar returns. This was until a few months ago, when the Organisation of Petroleum Exporting Countries decided to restrict its production by 1.2million barrels a day. Based on OPEC's poor track record in acting cohesively to drive oil prices higher, analysts were quick to criticise the move as doomed for failure. But, they soon changed their mind when international crude oil prices soared from 9.75 to more than 23 a barrel in eight months. This explains why South Africans have had so many petrol price increases. It also explains why inflation is beginning to surface in the US and was probably a reason behind the US Federal Reserve adopting a tighter bias towards monetary policy this week. Inflation is the reason why I believe gold should sustain its rally. The metal is beginning to challenge the dollar's dominance as a safe haven in times of uncertainty and rising inflation. This makes the price rally more sustainable than previous ones. SA must be one of the few countries in the world where the man in the street knows what the gold price is on an almost hourly basis. This indicates the extent to which our lives are inextricably linked to the fortunes of gold mining. Not only does it account for 19% of our total exports, but if gold sustains its momentum the lives of Mr and Mrs Average could soon be affected. The government won't be collecting as much as the R1.1-billion per quarter it was collecting from the gold producers in 1985, but it stands to increase its tax revenue from R170-million per quarter when gold was languishing at levels around 260 to almost R310-million per quarter, at levels around 300. This gives the minister of finance room to improve his fiscal numbers further and, this is the part that appeals to me - to cut personal taxation if he chooses to in his Budget next year. The other positive spin-off of having a higher gold price is that for every 10 increase, the current account of the balance of payments improves by R870-million a year. This creates an environment in which the rand can trade stronger, and in which interest rates can be cut. It could also make the government more confident to ease Exchange Control restrictions. If market speculation is correct, and the government increases the amount insurance companies, pension funds and unit trusts are allowed to diversify of their assets offshore from 15% to 30%, the rand shouldn't be adversely affected as much as what markets fear. A stronger gold price means a stronger rand, and this suggests investors will be in no rush to hedge themselves in offshore markets. I sense the decision made by the 15 European central banks recently to limit their gold sales to 400 tons a year may have been motivated by managing their asset prudently, rather than by a goodwill gesture to assist Third World debt by not flooding the market with reserves they felt had no value. They must have realised that if inflation was rising in the developed world, it would be a matter of time before the dollar's value was undermined, and the gold rush was rediscovered. This time, the gold's rally is more than a flash in the pan. ? Colen Garrow is an economist at ABN Amro btimes.co.za