Interview: Godsell (Anglo) Norman (Bulliondesk)
World Business Review
World Service Business Editor Martin Webber casts his eye over this week's main stories
In World Business Review Martin Webber looks at the boom in gold and platinum, two precious metals which have proven far safer investments than volatile stockmarkets in recent months.
When investors get nervous they traditionally rush to buy gold. The past week was no exception, as tension mounted over Iraq and North Korea.
The price of the ultimate safe haven rose strongly, with Gold hitting 390 dollars an ounce at one point - that's a rise of 40 per cent in the past two years.
It's all rather embarrassing for one man - Britain's chief finance minister, Gordon Brown, who sold off a huge chunk of Britain's gold when it had just hit its low point three years ago.
According to some analysts that mistake has cost Britain more than a billion dollars.
Mr Brown certainly seems to have been outwitted by millions of people in India who've done the opposite of Mr Brown and cleverly bought gold when it was cheap and
are selling it now that its gone up.
In the past week, many people in Mumbai were rushing to the bank to cash in their gains.
"This is a good time to sell gold, gold prices have really gone up and who knows whether they are going to drop in the next couple of weeks or not with war looming large."
"We are selling the gold because this is the best time. Actually we came here to buy some for the wedding that's going to happen in our family, but my mother said this is the best time to sell."
"The options of investment are so limited that gold seems to be a good investment right now so the prices are going through the roof. I don't know how long this will continue but it seems like a good time to invest, though I'm still thinking I'm not too sure whether I will buy or sell or anything like that.")
But is this just a temporary gain for the gold price, will the metal plunge in price again when international tension abates?
Not according to Bobby Godsell - who's the Chief executive of AngloGold - the world's second largest gold producer.
BOBBY GODSELL
"The world has discovered that we aren't at the end of economic cycles, you know three years ago the view was that US equities were going to go up forever, people were talking about the Dow at 26,000. They're not doing that anymore.
"People realise that every wealth asset has its cycle, property, equities, bonds have cycles and gold has a cycle that is often counter-cyclical to, for example, equities and bonds, so it is much easier to interest investors.
"Now these are long-term factors, these are not Iraq war driven. This is a secular change and I think the prospects for investment in gold are much better now than they have been for the last two decades."
Gold is certainly attracting plenty of attention. I've been talking to Ross Norman, who runs a web site thebulliondesk.com.
ROSS NORMAN
"We've had a continuing collapse in the equity markets and we've got the war on terrorism. Specifically we've got on the agenda Iraq, but of course there is a fear that the canvas could be broadened to encapsulate North Korea, there are questions about Iran, Algeria and so on. And all this is served to undermine investors' confidence in other investment vehicles and gold has benefited.
MARTIN WEBBER
But these are all sort of more negatives for other things, rather than specifically positives for gold and we have heard quite a lot of reports of people in India, which is the key source of actual demand for gold, and they're all selling because they seem to think that gold at $400 an ounce is an unsustainable price and now is the time to get out. Do you think they're right?
ROSS NORMAN
"I don't think that's altogether the case, gold has got some fantastic fundamentals in its own right. I mean South African production is at its lowest since 1953, below 400 tonnes. Mining exploration spend, the curve is so steep you wouldn't frankly want to ski down in it."
MARTIN WEBBER
There's a collapse in spending basically
ROSS NORMAN
"Absolutely the case. Touching on India, funny enough we were speaking to some Indian banks this morning and they corroborate your sentiment there about queues of people looking to sell gold.
"Bear in mind in Indian rupee terms gold is at an all-time-high and in the South and an Agrarian society like that there's a huge temptation to want to take profit at those levels. Conversely in Japan and in China people are also queuing but to buy gold.
"China, last month, liberalised its gold market, and like the Indians the Chinese have a strong cultural affinity for gold, so there is strong physical buying out of China and indeed in Japan.
"The Japanese have the same concerns that we do in the West about the investment world. In addition to which they've got the concerns over the banking. The government provided guarantees against deposits held by banks. That is being withdrawn. Consequently there's been extremely strong buying out of Japan."
MARTIN WEBBER
All those people in India are getting it wrong then, you think that prices could go even higher?
ROSS NORMAN
"My concern is that the Indians stop selling and there's a reasonable chance of them doing so if they believe the market could rally significantly higher. You could see a self-fuelling momentum being created whereby buying leads to higher prices, leads to greater buying. And that could lead the gold market significantly higher.
"The gold producers have stopped killing former rallies in the gold market because they believe the market could rally. If the Indians held back from selling then the gold market could shoot higher and that would not be constructive for gold in the long-term."
MARTIN WEBBER
We heard on our programme from Bobby Godsell the head of AngloGold the world's second biggest producer. He was talking very much about the good long-term investment prospects for gold, that it's not just about this possible war in Iraq. Do you agree? Is that not just the sort of thing a gold producer would say though isn't it, that there's good prospects for his commodity?
ROSS NORMAN
"Well I think the gold market has been guilty in the past of trying to talk up the market and falling flat on its face but actually for the first time in over a generation I think we've got the best answer in town, and I do think that he's right to say that gold could continue to rally firmly, very strongly from here.
"But the gold market currently spends less than 0.05% of its turnover on promoting gold, ordinarily successful businesses or sectors spend between 5% and 10% of their sales. Gold is a $35bn market, we spend almost nothing effectively on promoting gold. That needs to change.
"I sense there's a great degree of goodwill towards gold. To translate that into sales we need a promotional spend. That's the first aspect. The second aspect is to create access to the gold market.
"It sounds almost nonsensical but it's quite true to say that for the ordinary investors it's almost impossible to enter this market. Yes as an institutional shareholder you can buy gold through your Comex floor broker but as an ordinary investors it's almost impossible. You can buy jewellery, you can buy coin, both of which have a too large a premium over the spot price, or you can buy gold equities which is a derivative of gold but you can't buy gold itself.
"There is no online broker like Charles Schwab to whom you can go to, get research and analysis, buy gold and look at your account online. So gold has failed to be prepared for this, to use an over-used expression, golden opportunity that's presented to it. It needs to create access for the ordinary Western investor.
MARTIN WEBBER
Do you think the central banks are feeling a bit stupid at the moment because they all sold an awful lot of gold on behalf of tax payers around Western Europe a few years ago when the gold price was much lower than it is at the moment?
ROSS NORMAN
"One Chancellor in particular comes to mind of course is Mr Gordon Brown. He sold off close to 400 tonnes of Britain's 700 tonnes of gold reserve assets. The action was commenced when gold was nudging a 23-year-low and the average price that he achieved for that 400 tonnes was $273 an ounce, we are currently at $375 an ounce. UK PLC has netted a loss of close to $1.5bn. Not very prudent."
MARTIN WEBBER
It sounds like a worse disaster than when Britain got thrown out of the Exchange Rate Mechanism.
ROSS NORMAN
"Well it is a disaster. Actually the problem is compounded not just by the loss in the value of the gold, it also was invested in other non-earning assets such as the euro and the yen which depreciated against sterling so actually the loss is greater than just the fall in the gold price would suggest. I think it's been a calamity.
"To hold gold as a reserve asset underpins the confidence people have in dealing with British companies, it provides stability to our economy.
"The other interesting aspect about this is that roughly 75% of central banks reserve assets is the US dollar. There is a sense that the US is becoming both politically and economically more isolated as a result of its war on terrorism and there is a sense that some central banks may be less inclined to hold US assets, whether it's dollars or indeed US equities, and for that reason we've seen the collapse in those currencies.
"There is a move at the same time by a group of Islamic countries to create a gold-backed Islamic dinar and that would be the basis of trade between those nations and of course significant amounts of trade goes through those countries in oil. So I think that this indicates several central bankers unease with the US policy, politically and economically."
Ross Norman of thebulliondesk.com.
Platinum is almost twice as costly per ounce as gold and it's been enjoying some spectacular gains in recent weeks as well.
The long run demand for platinum is expected to be boosted by a switch to use of fuel cells - technology which is apparently being embraced by President Bush. In his recent state of the union adress, Mr Bush proposed a 1.2 billion dollar research programme to develop clean hydrogen powered cars.
US PRESIDENT BUSH
"With a new national commitment, our scientists and engineers will overcome obstacles to taking these cars from laboratory to showroom - so that the first car driven by a child born today could be powered by hydrogen, and pollution-free."
For more on platinum and its role in a fuel cell I turned to Mike Steel who's research director of the metals group, Johnson Matthey.
MIKE STEEL
"What it does is it combines hydrogen and oxygen catalytically to produce water. In fact it's the reverse of the reaction where you use electricity to split water into hydrogen and oxygen. This way you are putting them back together again and you are getting some of the current back out."
MARTIN WEBBER
It sounds a very complicated thing to happen instead of burning petrol. How does this operate in terms of someone with a vehicle, do they still load up with petrol or do they load up with something completely different?
MIKE STEEL
"You need to have a source of hydrogen and that can either be a hydrocarbon fuel and petrol, gasoline is one potential although you could use liquefied natural gas, you could use methanol, or alternatively you could actually store hydrogen in a tank on the vehicle and then you would just go to a filling station and you could fill up the tank and pure hydrogen would be in the tank and fed directly into the fuel cell."
MARTIN WEBBER
Would you have then got that hydrogen at some earlier stage in the process from hydrocarbons, from petrol oil?
MIKE STEEL
"Yes, although longer-term one can see a renewable energy source here where you would actually use sunlight to split water. That's a goal which I think won't be achieved for 20 or 25 years from now but it's something to which people are already working."
MARTIN WEBBER
Because if we are expecting people to invest in all these fuel cells there has to be a big gain in it because it's going to be a very expensive process and if you're saying well actually initially we're still going to need petrol and oil, what's the benefit?
MIKE STEEL
"One of the great attractions of the fuel cell is it's an electrochemical process and that means it's not a process in which a fuel is burnt. If you use an electrochemical process you can actually get the energy out with much higher efficiency so high efficiency is one of the main drivers for fuel cells."
MARTIN WEBBER
So what's the end result just steam?
MIKE STEEL
"The end result is steam which is another very positive thing for the fuel cell because it is non-polluting."
MARTIN WEBBER
And what part does platinum play in all this?
MIKE STEEL
Well you can't just put hydrogen and oxygen together and expect them to join back into water. You actually need a catalyst and that's a material which speeds up a reaction and in fact platinum is the only metal that we are aware of that will actually produce that result."
MARTIN WEBBER
And what is the volume of demand you can see if these fuel cells take off?
MIKE STEEL
This has the potential to be a demand in excess of a million ounces a year of platinum. The current market in total is between six million and seven million ounces.
MARTIN WEBBER
Is this one of the reasons why the price of platinum seems to be going up so quickly? We see it now at something like $700 an ounce.
MIKE STEEL
"No, I don't think that's really behind the price. The price was high for other reasons. The demand is very strong in many other applications. In jewellery it's been particularly strong in China. The Chinese have gone into white metal and platinum jewellery in particular in a very big way in the last five years. There was a strong pent up demand, a desire by many of the younger Chinese to be different from their parents. It's a break from the past. The parents seem to like the very simple yellow gold jewellery. They are looking for the quality of platinum, the higher purity and they are looking for design features.
Mike Steel of the metals group, Johnson Matthey, studying closely jewellery trends in China.
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