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To: ms.smartest.person who wrote (305)	9/27/2003 9:31:54 PM
From: ms.smartest.person	Respond to of 307

Is Gold just a commodity? By Rob Davies Base metal markets look lost these days. Most of them have made reasonable progress over the year. Some, notably nickel, on the basis of good fundamentals while others, like aluminium, on complex trading that has attracted the attention of the authorities. Having reached these levels, by whatever route, it seems that they are pausing for breath, like mountaineers, to determine whether they should push on to ever higher pastures or give up now while they still can. In the meantime all the action is focussing on gold, which has suddenly come to life again. Gold is not a proper commodity as many and more erudite commentators have noted. It retains a monetary dimension that pops up from time to time, embarrassing a finance minister or two, just to remind the world that it has other qualities in addition to decorating footballers? wives. The problem with gold though is that it is neither fish nor forint. It does not behave as a monetary asset, because no one really controls it, and it suffers from the small problem of indestructibility as a commodity. Where is the future in producing something that never wears out, never becomes obsolete and is not biodegradable? Looking at gold as a monetary asset leads to some other puzzling questions. First, we have to remember that gold these days is actually a rather small market. The total value of new mine production is just over US$30 billion. While that is considerably more than my wine bill it is only two thirds of the cash held by Microsoft. In other words Bill Gates could propose to the Microsoft board that it purchase the entire output from every gold mine in the world for one year and still have the best part of US$20 billion in change. Or look at it another way. In May this year foreigners spent US$100 billion purchasing bonds sold by the US Government. By foreigners we mean central banks in Asia who are the biggest buyers of US Treasuries. So in one month these banks spent money equivalent to buying three years worth of new gold production. These analogies might seem to be labouring the point a bit, but the message is clear. The gold market is very small in world terms and that is important when viewed from the stance of a central banker. And it is perceptions of what these central bankers might do that is the underlying factor driving the gold price. The market knows that Asian central banks hold nearly half of all the issued US sovereign debt, and that they are probably nervous of having such a lopsided portfolio. In theory of course it is the US Government that should be worried but it is rather reminiscent of that old joke about the borrower and the bank. When the borrower owes a little he is the one that worries. When he owes the bank a fortune it is the bank that is nervous. So it must be with these Asian banks. They would undoubtedly love to diversify their asset base, but buying gold in large quantities can never be a viable option for them. Their problem is ?lobster pot risk?, easy to get into, impossible to get out of. The sheer lack of liquidity means that there is no way now that gold can now play a major role in the finances of large governments. The market has simply shrunk too much. Maybe Gordon Brown would be best advised to sell the rest of his gold pile and buy Microsoft shares and wait for the cash to be returned as dividends. minesite.com

To: ms.smartest.person who wrote (305)	9/27/2003 9:57:38 PM
From: ms.smartest.person	Respond to of 307

Hunting for nickel Date :August 28, 2003 By Rob Davies Apparently it is the hunting season in Canada. Exactly who is hunting for what is not clear to me but it is evidently very important to the Canadian way of life. So much so that it seems to have become the primary factor in the strike at Inco?s operation at Sudbury in Canada. Now in its eleventh week this strike has sharply reduced the flow of metal into world markets causing another drop in inventories and provided the excuse to take the nickel almost to US$10,000 a tonne. The last time the price was at this mark was at the turn of the millennium when global liquidity was very high and many asset prices were at record levels. Unfortunately, property and bonds apart, those prices simply remain a fond memory for most investors. There are fewer grounds for thinking that we are going to get a similar sell-off this time, at least in nickel. The strike, and longer-term production problems at mines using new technology, has limited the flow of new metal at the same time that the demand for nickel has been strong. Much of the increased requirement for nickel has come from the booming Chinese economy. It is estimated that this one region alone nowaccounts for 20 per cent of world nickel consumption. These solid fundamentals have resulted in nickel stocks falling to 16,700 tonnes, a figure that contrasts starkly with the 48,000 tonnes the last time prices were this high, three and a half years ago. While there is a risk that the Canadians get bored of shooting small birds with big guns and go back to work, thus reinstating 9 per cent of the world?s nickel production, other factors are likely to play a part in keeping prices up. Those low inventory levels mean that consumers have precious little alternative to paying full price for the metal. Low stocks would make it hard to borrow nickel and hope for prices to weaken later. Furthermore, strength in share and bond prices suggests that the long awaited global economic recovery is here and that will increase consumption of all metals. It also improves sentiment. Thus, last week was a good opportunity for one respected metals analyst to say that he was revising up his nickel price forecast to US$11,465 a tonne for 2004 from the previous figure of US$9,920. Those changes to forecasts always have more impact when prices are rising than when they are falling, static or just plain weak. Forecasting a continuation of a new trend is a common practice in investment banking and is a good way to attract attention from the press and from clients. The foreign exchange market provides many examples of such practice. It seems hard to credit now that it was only a few months ago that major investment banks were rapidly revising their dollar/euro exchange rate forecast. Then the rate had surged to US$1.20 and experts were forecasting it to go to US$1.50. Since then it has been in gradual decline and is now back down to US$1.08. Funnily enough you don?t hear so much about those bullish exchange rate forecasts now. But I suppose foreign exchange rate forecasters don?t have to factor the quality of the hunting season into their calculations like metals analysts do. minesite.com