What say you to the following article? The negative things it says about gold SEEM to be gaining credibility with time, eh? Just when so many think that gold should be staging a comeback, we have just heard from Abby Cohen this a.m. on CNBC that the US economy will be strong in 1999 and the Brazilian Crisis was a localized event of little or no consequence to the US economy.....which tend to suggest that gold will remain weak or get weaker in 1999. I don't mean to say that Abby Cohen is infallible. To be sure, she has indirectly cast some doubts about the yellow metal.
Precious metals: The death of gold
SATURDAY DECEMBER 13 1997
Gold has always been more than a precious metal - men have even lost their
lives for it. But no longer. Gold has fallen from grace and is now a mere metal
and a bad investment. Kenneth Gooding explains why most of the glister has
disappeared.
Gold, frankincense and myrrh. The three wise men deemed these gifts suitable
for the King of Kings two millenniums ago. It says something about gold's
staying power that today it is still a suitable gift for a sovereign, though a more
thoughtful wise man may swap the precious metal for US Treasury bonds.
Mankind's fascination with gold goes back much further than 2,000 years. For
primitive man, the attraction was aesthetic. Gold glinted at him from streams
and river beds. He found it so malleable that, even cold, it could be hammered
into crude ornaments and artefacts. Beauty and scarcity gave gold mystical
appeal, and it became the stuff of temples, icons, idols, and offerings to the
gods.
Ancient Egypt and Rome drew much power from gold, mined by slaves in
conditions of unbelievable misery. "There is absolutely no consideration nor
relaxation for sick or maimed, for aged man or weak woman," wrote the
historian Diodorus in the 2nd century BC.
Similar conditions existed in Siberian gold mines up to the 1960s and miners
still descend the deep shafts of South Africa knowing that, even if they obey
the safety rules, there is no guarantee they will come out alive.
For the rich, and for the poor who sought it, gold was a tangible, long-term
store of wealth, acceptable anywhere, a safe haven at times of disaster.
But gold is not what it once was. The image has been tarnished - apart from a
couple of blips, its price has been drifting downwards for more than a decade.
This week the price was the lowest for 18 years.
The 1987 stock market crash, the Gulf war and a meltdown of Asia's financial
markets did not cause the expected rush for gold.
So, has gold had its day, at least as an investment? Has the glister gone? Is it
only the sentimental and the gold obsessed, the bugs, who still seek it out and,
as Virgil put it, have the "cursed craving for gold"?
Ted Arnold has no craving. He is a gold bear and metals specialist at the
Merrill Lynch financial services group: "The reality is that gold is now a
commodity just like any other. Many gold miners still think gold is something
special or magical and not subject to the usual laws of supply and demand like copper
or zinc or nickel. But it is."
But will everyone everywhere eventually stop viewing gold as an investment?
Is the end of the affair an inevitable outcome of modernisation, when money
transfers are automatic and unseen, and there is talk that cash itself will
disappear? When it became clear that people needed a medium of exchange,
gold was the medium of choice. Croesus, King of Lydia, is credited with
ordering the first gold coins to be struck in 550 BC.
Gold's great appeal was its indestructability. It does not tarnish like silver and
is generally not corroded by acid. Gold coins have been recovered from
sunken treasure ships looking as bright as new. And the metal still has its
modern moments. There was a rush to gold savings accounts in Japan after
television newcasts of the 1995 Kobe earthquake showed an old woman
tearing at the rubble of her house and triumphantly pulling out an unscathed,
glittering gold bar.
There are estimates, not uncontested, that until 1850 only 10,000 tonnes of
gold had ever been mined. The 1848-49 Californian gold rush changed all
that, followed by the discovery of huge gold fields in South Africa in the
1890s. There was another belated rush in 1980 after the price jumped to
$850 - almost three times its present price.
Miners have been using new techniques and modern technology to locate and
remove the gold. Last year, a record 2,350 tonnes were dug from the world's
mines, or 75.56m ounces.
A turning point occurred when gold became a standard measure of wealth,
personal and national. Formal "gold standards" were introduced by trading
nations after the Californian rush ensured there was enough metal available.
Britain's began in 1816 and the rest of Europe followed in the 1870s. The US
did not finally divorce itself from a silver-gold standard until 1900, about the
same time as India.
The gold standard was meant to discipline an economy. The price was fixed
and the currency was redeemable in gold. The UK gave up this system in
1919 but it persisted in the US until 1933.
Between the 1930s and 1972 there was an "international gold exchange
standard" which involved central banks supplementing their gold reserves with
certain key currencies that, in theory, could be redeemed for gold.
All this led to central banks building substantial stocks of gold and caused one
Yale professor, Robert Triffin, famously to remark: "Nobody could ever have
conceived of a more absurd waste of human resources than to dig gold in
distant corners of the earth for the sole purpose of transporting it and
reburying it immediately afterwards in other deep holes, especially excavated
to receive it and heavily guarded to protect it."
Today, most gold goes to make jewellery rather than into central bank vaults.
According to the Gold Fields Mineral Services consultancy, 2,807 tonnes of
gold was used by jewellery makers last year.
Unreconstructed gold bulls emphasise that this was far more than the 2,350
tonnes that came out of mines during the year. Demand for gold this year has
been at record levels - Indians, for example, bought more in the first nine
months than in the whole of 1996 - yet the dollar price of gold has slumped by
20 per cent. The price has fallen because of increasing fears that central banks
will steadily sell off gold - they still have 37,000 tonnes tucked away in vaults,
equivalent to more than 12 years' supply.
The new breed of central banker is not dazzled by gold and sees little point in
having an asset that just takes up storage space. Some have been getting a
modest return by lending gold to bullion banks, earning 1 or 2 per cent and
adding to market liquidity.
That did not satisfy performance-oriented bankers, economic rationalists who
were not charmed by the romance of gold. For them, as for the 14th century
Scottish poet Andrew of Wyntoun, "Oure gold wes changyd into lede". So the
central bankers started selling.
The Netherlands said in January that it had sold 300 tonnes, the fourth
disposal since 1989; since then it has cut gold reserves by 20 per cent. In July,
Australia shook the market by announcing that it had reduced its gold reserves
by two-thirds - even a leading gold producer seemed to have lost the faith.
And, two weeks ago, Argentina revealed it had sold its entire gold reserves in
the first half of this year, all 124 tonnes, and invested the proceeds, $1.46bn,
in US Treasury bonds.
Echoing the views of other central banks that complain gold is an unproductive asset,
Argentina's bank pointed out the bonds would yield
an average of 5 per cent and were expected to bring in $81m a year.
The biggest shock of all - and one that triggered the biggest one-day fall in the
gold price for four years - came in October when a panel of Swiss experts
suggested their country should sell more than half its reserves. Switzerland,
which has a law forbidding such sales, had fervently supported the idea that
prudent countries should have a reasonable stock of gold and had refused to
sell an ounce.
There have been big pro-fits made from gold's fall from grace. Some big US
commercial banks have made a killing in the last year or so by selling gold
short - selling gold they do not own in the expectation they can buy it at a
lower price before they have to deliver.
The gold market is now very much in the hands of these banks and New York
investment funds, according to Timothy Green, who has been tracking the
gold business for 30 years. He suggests that the trade has changed more in
that time than in the preceding 4,000 years.
In his book World of Gold*, Green argues that the ending of a fixed price for
gold by international governments in 1968 and the transformation in
communications have combined to change the gold market. "For many new
players in the market, volatility, not stability, was the chief attraction; to them it did not
matter whether the price went up or down, as long as it moved.
The communications network brought everyone together, round the world, round the
clock and made the gold price a moveable feast."
Nevertheless, there are still many millions of people who retain a deep faith in
gold. There are large parts of Asia where only a social revolution could
change the gold habit. In India, a farmer buys gold when the monsoons bring
good harvests and he sells it when the rains don't come.
Gold rings and necklaces are lavished on newborn Indian children and an
Indian bride is weighed down with gold jewellery. For an Indian woman,
prevented by Hindu law from having any proprietary rights over her father's or
husband's property, personal gold ornaments and jewellery offer financial
security.
Gold has retained symbolic value in the straight-forward transactions of rural
India, but it has been diminished by the modern trading techniques in
exchanges in the US and Europe. The money flowing into physical gold -
more than $27bn this year - is overwhelmed by amounts ploughed into
securities that are derived from gold.
In London in October, for example, gold worth $13.6bn a day was traded.
Using exotic cocktails of options, futures and warrants, the banks and funds
are "relieved of the acute embarrassment of having to take delivery of a single
ounce," according to Timothy Green.
But how long will gold's reserve of appeal last in developing countries?
"Gold," says Rob Weinberg, analyst at Deutsche Morgan Grenfell, "fills many
different roles simultaneously. It can be an adornment and an industrial metal;
a means of displaying wealth and an anonymous form of saving; an insurance
policy and a gambling chip; it is an international reserve asset yet officially it is not
money."
In the western world more people are buying gold to wear, as jewellery or
watches, because it makes them feel good and they can pretend to themselves
that these objects will hold their value. They conveniently ignore the fact that
the cost of design, production, profit and taxes usually far outstrips the value
of the gold content.
But when it comes to bullion as an investment, and as a measure of national
wealth, gold is a goner. The reverse alchemy is almost complete. Eddie
George, governor of the Bank of England, like Fort Knox, one of the great
citadels of gold, recently told a European parliamentary committee: "Whereas
gold used to be seen as a good asset, it is now seen as the bottom of the pile."
* World of Gold, Rosendale Press, £21.
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