Already a subscriber? Log in
‘Gold was seen as safe,’ agrees Rozanna Wozniak, investment research manager at the World Gold Council, an organisation funded by — and championing the interests of — gold-mining companies. ‘Gold has no default risk and no counterparty risk; it’s a hard asset, it’s simple, and it has thousands of years of history.’
During the summer, the gold price was buoyed further still by renewed worries about the weakness of the dollar, says Frederic Panizzutti, senior vice-president at MKS Finance, a Swiss precious metals trading house. ‘To buy gold, you need to buy dollars. When the dollar is weaker, it makes gold less expensive.’ This pushed the gold price over $1,000 per ounce — which created its own market momentum, Panizzutti says. ‘It prompted buying interest on the expectation that gold would break new highs. Gold traded in a self-motivated way at $1,010 and up.’
In the past six months, says Klapwijk, central banks became net purchasers of gold, and that also ‘buoyed investor sentiment as well as directly impacting the supply-demand balance for gold’. (History does not yet relate whether that means the Bank of England has been buying back the pile of gold Gordon Brown ordered it to sell a decade ago at about a quarter of today’s price.) Meanwhile, Barrick, a major gold-mine operator, also helped boost the gold price this summer by buying back 2.4 million ounces of the metal in connection with its hedging activities, Klapwijk adds.
What are the prospects for gold for the next six months and beyond? Unsurprisingly, given the mission of her employer, Wozniak remains bullish. ‘The reasons for investors to consider gold are more apparent than ever, from economic uncertainty, via currency uncertainty, to concerns over inflation. I don’t see gold as a safe haven; I see it as an insurance policy. And from that point of view, there is no reason why the gold price won’t be supported for many years to come.’
Wozniak believes that the recent surge of investor interest in gold is just the beginning of a long-term trend. ‘The allocation to gold by the global investment community, if you average it out, is tiny. We have only just started the process in which investors look at gold in a way they have not looked at it before — as an asset class in its own right. Gold is one of the few assets which really is a diversifier that can withstand periods of extreme economic uncertainty.’
Panizzutti is not so positive. ‘Although gold could well make a quick sparkle at $50 or $80 over the previous high, we don’t see any further potential at this stage. What is feeding the market right now are not the old fundamentals, but the disruptive factors of the financial crisis. On the assumption that things will become normal again in one to two years, we expect gold to trade in a range between $800 and $1,100 per ounce.’
Klapwijk is even more downbeat about the near future. ‘I would be very cautious about recommending gold when it is at an all-time high,’ he says. In his view, the current gold rally is ‘largely speculative and technical in nature, and very much based on the futures market. There is no convincing reason for it, other than the fact that the US dollar has moved a few cents weaker against the euro.’
A strengthening of the US dollar would be a particular blow to gold prices in the coming months, Klapwijk adds — and he believes that is quite likely: ‘Looking at the futures markets, there are record short positions on the US dollar. I wouldn’t be surprised if we saw a bear market rally in the currency at some point in the short term.’
Following this potential slump, the next big wave into gold, Klapwijk predicts, will be driven by inflation. ‘This wave will be more sustainable, broader based, and will take gold to new highs.’ How high? Up to $1,100 at least, he reckons.
Whatever happens to the gold price during the months and years ahead, John Doody, editor of Gold Stock Analyst, a fortnightly investment newsletter published in Florida, has a method for making a profit: investing in undervalued gold companies. ‘If the gold price goes up, we’ve got two ways to win. But if the gold price does nothing, we can still win on the undervalued aspect of our investments,’ he says. By September, Doody’s top ten gold stock picks were up 96 per cent since the beginning of the year. ‘With gold companies, everybody makes the same stuff and they can sell as much of it as they can produce, at the market price. So when picking gold stocks, you have to work your way back to cash [production] costs. If a company has a cash cost of $800 an ounce, it might not be worth much. But if it has a cash cost of $400 an ounce, it may be worth a lot. The market is not efficient. It does not value every company properly.’
Doody, for one, sees a glistening future for his beloved precious metal. ‘I’m a professor of economics by trade. Until the macroeconomic picture changes, there is no reason to expect gold to falter.’
Also in Society
Latest
Comments
Join the debate for just $5 for 3 months
Be part of the conversation with other Spectator readers by getting your first three months for $5.
UNLOCK ACCESS Just $5 for 3 monthsAlready a subscriber? Log in