Anatomy of a gold market
How the golden bull got his horns
TWO YEARS ago David Davis, a gold analyst for Credit Suisse Standard Securities (then Andisa Securities) wrote a 55page report called The Future of Gold. At the time, the gold price had staged a promising recovery from a low of $255/oz to around $430/oz. The gains represented a recovery but there was scepticism that the gold price could travel much further. Optimists were smoking their socks.
According to Davis’s report, however, the gold price would be $700/oz by 31 December 2008, increasing to $1 200/oz in 2015. Given that he was too conservative for 2008 (gold breached $700/oz last year and is tipped to do so again in 2007), can we suppose $1 200/oz is too timid a suggestion as well?
“Putting all the factors together, we’ve got an inextricable change that only a collapse in the jewellery market can stop,” says Davis. Jewellery demand accounts for just over 2 000 tons/year of the 2 600 tons annual production.
But the astounding fact is that the world’s primary production of gold has been in supply deficit, with minor exceptions, for the last 15 to 20 years. That means not enough new gold is being mined to feed demand. Take 1997, which recorded a primary gold supply deficit of 1 000 tons, says Davis. Why then the 20year-long gold bear
According to Davis, secondary supply of gold from central banks filled the supply deficit. Today, this is changing as the difficulty of finding new primary supply increases. Geopolitical disorders and US dollar distress are other factors changing the playing field. For years, hopelessly converted gold bulls have been talking (raving) about a runaway gold price. They could be right.
Says Cockerill: “Existing mines are mature. The rate of newly discovered gold is inadequate, and gold producers have been steadily de-hedging.” He also believes US inflation is “beginning to rear its head”.
Perfectly respectable professionals, becoming emotional about the infamously fickle gold price, may appear unseemly, but the change in sentiment towards gold is broader than that. It’s also being reflected in the sudden popularisation of the gold-backed exchange traded funds (ETF), one of which trades on the JSE as Newgold.
These are shares backed by actual gold but without the cost and hassle of actually holding the metal. Instead, it’s held on behalf of the scrip owner in a bank vault. There’s also less of a bid/ask spread than in gold coins, where it is around 15%. The spread between buyers and sellers in ETFs is only 1%.
In addition, the share can be redeemed. Interestingly, however, it seldom is, says Cockerill. “When gold fell from $725 to $600/oz last year, the redemptions on the ETFs were minimal. This is sticky money and new money.” Moms and pops can own the ETF because it trades like a share and tends to react with less volatility than the actual dollar price of gold.
Meanwhile, Cockerill sees the hand of professional investors in the gold price. “You can see it happening. The gold price goes up and then corrects but never to the level from which it came.
“Personally, I can see the gold price going significantly higher.”
David Davis, gold analyst, Credit Suisse Standard Securities