Gold struggles to retain safe-haven status
By Stephen Wyatt
In the past month the gold market has risen from its grave. It almost broke through $US300/oz on Friday, its highest level for three months, up like a zombie from its 19-year lows of $US273/oz hit last month and a price rise of almost 10 per cent.
In Australian dollar terms, gold hit its highest level since March 1996 on Friday, breaking $A500/oz for the first time in two years. The confluence of the higher US dollar gold price and the lower Australian dollar have caused a strong price rise of almost 18 per cent so far this year.
For Australian gold producers, this is no bear market. But they would still like the US dollar price to keep rising to be able to lock in some attractive forward prices.
Over the New York trading day on Friday, however, the gold price slipped back from its $US299.50/oz highs as the US dollar rallied strongly against the yen. Gold ended up around $US294/oz.
Even so, gold's recent strength, in the face of rising concerns about a systemic collapse in the global economy, has several analysts asking whether it is regaining some of its status as a financial asset of last resort, a safety haven in times of economic upheaval.
The global economy had not yet unravelled enough to see concerted gold buying, said Mr Dinsa Mehta, Chase Manhattan Bank's managing director, commodities, in New York. But he believed the gold market would be boosted if the global economy became increasingly dislocated.
Others, however, remain bearish about gold's future.
"If gold is incapable of a meaningful rally in the face of the current myriad of seemingly bullish events [equity market volatility, emerging market concerns, Russian economic chaos, a weaker dollar, deflating Japan and rising concerns about global economic conditions], we wonder what it will take to awake this metal from its ongoing slumber," said Mr Ted Arnold, senior metals analyst with Merrill Lynch in London.
ABARE, Australia's official commodity forecasting group, also has a sanguine view of gold's future. It forecasts gold prices to remain below $US300/oz over the rest of this year and to average $US293/oz for the year as a whole.
"In the absence of further one-off events such as the South Korean and Indonesian gold sales earlier this year [about 290 tonnes of scrap gold was sold by these countries in the first quarter], gold prices are forecast to recover marginally in 1999 to average around $US300/oz," ABARE said in its Australian Commodities quarterly, published last week.
This view is based on lower global demand for industrial and jewellery uses for gold because of lower world economic growth. At the same time, ABARE sees little reduction in gold mine production and high levels of producer hedging over the next two years.
Lower gold borrowing costs, due to increasing gold lending by central banks and lower currencies in gold-producing countries such as Australia, South Africa and Canada, are factors driving gold producers to forward sell (hedge sell).
ABARE estimates that 1997-98 Australian gold production will be about 317 tonnes, the highest yearly production on record. It forecasts 1998-99 production will be 313 tonnes. This makes gold Australia's second most important commodity export earner after metallurgical coal.
This lack of supply adjustment (lower production) to the lower gold price also has not occurred globally and it is one of gold's problems.
Mr Arnold said gold would not be able to move higher until world gold production fell by 300 to 400 tonnes. Without this, Merrill Lynch suggested gold would continue to decline over the next six to 12 months, albeit at a slower rate.
This view is supported by Gold Fields Mineral Services, a UK-based gold research group, which forecast global mine output in the second half of 1998 would be 8 per cent higher than in the first half. At the same time, it expected bar hoarding to halve.
As a result, GFMS forecast the gold price would average $US279/oz over the second half of 98. This implied a $US270 average in the fourth quarter. "It is probable that price will fall below $US270 for extended periods," GFMS added.
Even more damning for gold were recent statements by Mr Mark Anson, portfolio manager of Oppenheimer's Real Asset Fund.
"Gold is viewed as an underperforming asset which is currently underweighted in the fund," he said. "Gold has trailed the riskless investments such as treasury bills and has underperformed inflation from 1990-1997. Compared to other asset classes, it has been a laggard."
In fact, gold was the only asset class which had shown a negative total return and Mr Anson could not see any reason for the future of gold to be much different.
In short, the major factor that has killed gold's role as a financial asset is simply that there has been a better asset of safety – US treasuries. The growing economic hegemony of the post-World War US has elevated the US dollar, along with US treasuries, above gold as the ultimate assets of safety.
Gold's inability to rally in the face of the present global economic crisis and soaring treasury prices are showing just this.
afr.com.au |
