Go for Gold! (Mining Notebook)

By Ahmed, Rafiq | African Business, July-August 2002 | Go to article overview

Go for Gold! (Mining Notebook)


Ahmed, Rafiq, African Business


In these unsure times, everybody wants a bit of certainty - and that means good, old fashioned gold. But for how long will the high prices hold? Is it time to invest in the yellow metal or pull out?

In times of international uncertainties, investors turn to more tangible assets, such as real estate and precious metals. Gold possesses the distinctive characteristics of money: it serves as a medium of exchange, a store of wealth (long-term savings) and a unit of value. Besides gold holdings, investors are lately showing preference for gold bars, gold coins, paper (metal certificates) and specialist funds (which invest exclusively in gold mining company shares), monitored by the FTSE Gold Mines Index.

This index, which tracks gold equity markets in the Americas, Africa and Australasia, boasts market capitalisation of $50.63bn and has generated a 62% return in the year to June 2002. The gold price surged through the key resistance level of $320 a troy ounce (oz) in late May and touched $330/0z in Hong Kong in June before slipping back because of light profit-taking by investment funds.

There have been seven short-lived rallies since February 1996 when gold hit $420oz. However, most analysts believe the market's upside potentials now have solid fundamentals. Kelvin Williams, marketing director of AngloGold, the world's largest gold producer, said: "Unlike other price rallies in recent years, where the gold price has tended to rise on the back of a single issue or incident, the current price improvement has been built on a number of favourable circumstances for gold."

The positive factors underpinning gold's new-found lustre among institutional and private investors are:

*A marked turnaround in investor sentiment largely because of geopolitical tensions, which if sustained over the coming months, can prove crucial in reviving the industry's fortunes. Chris Thompson, chief executive of Gold Fields, remarked: "People are feeling far less secure than previously. Gold has always been the investment that people reach for when they feel uncomfortable."

*The substantial reductions in producer-hedging, i.e. forward-selling on the gold derivative markets. This indicates limited downside risk for gold prices. Lately, there has been a marked change in producers' hedging strategies. Jonathan Best, AngloGold's financial director explained: "We've continued to manage our hedge book aggressively and we are taking out the weaker positions in the hedge book right now so that going forward, we don't have a long period when we will be receiving lower prices or incurring an opportunity loss." AngloGold has cut its hedging positions by about 105.74t during the past six months.

Heavy hedge-book loses?

According to Gold Fields' findings, hedge-book financial losses to producers could be heavy over the next few years if prices surge to between $330/oz and $345/oz. Macquarie Bank (Australia) estimates that total hedge-book of gold miners world-wide may drop by 400t in 2002.

Therefore, the supply of bullion in the markets will become tighter because of declining producer-hedging and robust investment demand should buoy the price of gold.

*Global mine production is expected to decline this year or next thanks to greater consolidation and rationalisation within the industry during the past two years.

*The gold rally was also helped by the US dollar's weakness against a number of other major currencies. A softer greenback versus the euro and the yen, in fact, reduces gold prices in many other currencies, thereby malting the precious metal more attractive to buyers in Asia-Pacific and Europe. The greenback and gold have a counter-cyclical relationship. If the dollar surges, bullion prices fall and vice versa.

*Lower US money market rates are discouraging speculative short-selling of gold by international hedge funds.

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