Gold's versatility shines through
By Kevin Morrison
Published: June 9 2003 11:30 | Last Updated: June 9 2003 11:30
Gold to the Pharaohs of Ancient Egypt was "flesh of the gods" to the early Christians it was a symbol of heavenly light and divine glory, but today the world is not quite sure what to make of the precious metal.
Gold is no longer the jewellery metal of choice to many well-heeled young people in the United States, Britain and China, who prefer instead to to wear platinum.
Most investors still value it as a currency, a role it has played for most of its history, although some see it like any other metal where the price is determined by supply and demand trends.
Steve Matthews, a commodities strategist at hedge fund manager Tudor Investment Corp, is clear what he thinks about gold.
"For us as a trading institution, gold behaves as a foreign exchange instrument, not as a regular commodity like wheat or live cattle," Mr Matthews told the London Bullion Market Association gold conference this week.
"The fundamentals put it outside the range of commodity trading for us. Which doesn't mean we don't trade it, we do, but it's as a foreign exchange, not as a commodity," Mr Matthew told the conference, which was held in Lisbon.
This view, if correct, should bode well for gold in the forseeable future.
Given that most of gold's 40 per cent rise since reaching a 21-year nadir of $252.85 in July 1999 to the current level of about $367 a troy ounce has happened since the beginning of last year, over the same time the US dollar has fallen by about a third.
This performance reinforces the perception that gold has an inverse relationship with the world's most traded currency.
Based on Tudor's supply and demand assumptions, Matthews says there is enough gold above the ground that would supply 6,677 days of current demand, or more than 18 years. On this premise, Mr Matthews says demand issues should not influence the gold price.
All other commodities had less than a year's supply, ranging from soybean meal at less than three days to platinum at almost 300 days, and therefore should be valued as a commodity, Mr Matthews said.
Trevor Steel, partner at London-based specialist natural resources fund manager Baker Steel Capital Managers also likens gold to a currency.
"Where do investors go if they want to get out of the dollar? The Japanese government wants to weaken the yen, the euro is a new currency underpinned by economies that have already broken their own rules on budget deficits, designed to give the currency credibility. So you really have to pick the best of a bad bunch and that's where gold is starting to get a look in," said Mr Steel.
Many economists predict the dollar will slide further against the euro with estimates varying between $1.2 to $1.4 from the existing $1.18 level.
"If gold prices were to only track currencies, and the dollar were to reach $1.35 that would equate to a $419 gold price," said Allan Williamson, precious metals analyst at HSBC - the world's largest bullion bank.
HSBC forecasts the US dollar to reach $1.35 against the single currency by the end of next year.
Fund managers are betting $3.6bn that gold prices will rise further, largely at the expense of the dollar.
Investors in gold futures contracts on the Commodity Metals Exchange (Comex) in New York held net long positions, an indication by investors that prices will rise, of 9.8m ounces - more than all of the gold produced last year in the United States. This is about 50 per cent above the average net long position since funds started positioning themselves for higher prices in May 2001.
This is not too far off the record net long position on Comex gold of 12m ounces, which almost equates to total output from the world's largest producer South Africa, in early February when the gold price hit $388.50 a troy ounce, its highest level in more than six years.
Economists predict that next year will also see the US dollar reach its low point before turning around again, which will then test gold resilience. The gold industry is hoping that by this stage the gold price will revert to behaving like a commodity.
The World Gold Council, the industry lobby group backed by gold miners, hopes to list low cost exchange traded gold funds on the New York, London, Tokyo, Toronto and Johannesburg exchanges opening up gold investment to a wider audience. At present gold investors are the mainly funds and wealthy private investors.
The council is also promoting the gold funds as a prudent risk management tool to fund managers, given that the metalcan act as a natural hedge in any portfoilio, as it rises when times are bad and hence most funds are performing poorly, although it may clip returns in better economic times.
The industry is devising new initiatives in jewellery, and hopes to double industrial demand over the next decade. Last year gold usage in dentistry, electronics and other industrial applications accounted for about 8 per cent of total supply. |
