Oil dol­lars boost­ing gold

Gold Fields will be a ma­jor win­ner if price in­creases sharply this year

Finweek English Edition - - Creating wealth - LU­CAS DE LANGE

THE TEN­SIONS IN THE MID­DLE EAST, fol­low­ing the cap­ture of Bri­tish sailors and Marines by Iran, have again fo­cused the at­ten­tion on the Ara­bian oil states’ ten­dency to turn to gold in times of un­cer­tainty. In­di­ca­tions are that oil dol­lars are cur­rently be­ing con­verted into gold on a sub­stan­tial scale.

How­ever, it’s not only be­cause of the un­cer­tainty con­cern­ing Iran; there’s also a pat­tern de­vel­op­ing to di­ver­sify the oil states’ mas­sive re­serves. The euro in par­tic­u­lar is ap­pear­ing to an in­creas­ing ex­tent, but the trend is also re­flected by sup­ple­ment­ing gold stocks.

The World Gold Coun­cil – cur­rently analysing the trends of first quar­ter 2007 – also con­firms that gold-based ex­change­traded funds con­tinue to grow strongly. It’s ex­pected that the 109t they bought in the first quar­ter 2006 has been ex­ceeded and that this could be the trend for the rest of the year.

Ac­cord­ing to the Gold Year­book by the New York-based CPM group, in­vestors world­wide are con­tin­u­ing to buy large vol­umes of gold in bul­lion, coins and jew­ellery. Last year, they bought 43,5m ounces, com­pared with an av­er­age of 9,2m ounces a year in the 50 years up to 2000. CPM es­ti­mates that in­vestors in­creased their gold port­fo­lios by 241,5m ounces be­tween 2001 un­til the end of 2006 – equal to a quar­ter of the 1 045m ounces owned world­wide.

New­mont Min­ing CEO Wayne Murdy con­firms that an im­por­tant change of gear has taken place. His group’s pro­jec­tions in­di­cate that a long bull mar­ket will be ex­pe­ri­enced. That’s based on fac­tors such as: • On­go­ing po­lit­i­cal in­sta­bil­ity in the Mid­dle East. At the same time, an enor­mous shift of wealth to the area is tak­ing place due to high oil prices. The emer­gence of China and In­dia and other large east­ern coun­tries, such as In­done­sia, where gold is highly rated. Though cen­tral banks aren’t re­ally buy­ers, they aren’t big sell­ers ei­ther. In any event they’re bound by the gold agree­ment that puts a limit of 500t on their an­nual sales un­til Septem­ber 2009. The US dol­lar will con­tinue weak­en­ing be­cause of the United States’ huge cur­rent ac­count deficit. While a con­tin­u­ing strong de­mand is ex­pected this year, pro­duc­tion growth will re­main lim­ited. There are a num­ber of an­a­lysts who pre­dict that gold could reach $700/oz this year. And if it suc­ceeds in break­ing through the re­sis­tance level at $725,75/oz it could mean a strong run and large prof­its for in­vestors. What would be the best way for in­vestors in SA to ben­e­fit if a lengthy bull mar­ket is ex­pe­ri­enced? RBC Cap­i­tal Mar­kets, a group with 75 of­fices world­wide, sup­ported by a strong re­search di­vi­sion, used a model to de­ter­mine which com­pa­nies would ben­e­fit most if the gold price were to rise to $750/oz. Its sur­pris­ing con­clu­sion was that SA’s Gold Fields of­fers the best po­ten­tial. Ac­cord­ing to the model, its price could shoot up by 147%. The pat­tern that emerges is that buy­ers tend to buy strongly into gold pro­duc­ers with large re­serves and/or mines with a long life. An­other SA share that could do well is Har­mony.

Gold shares have al­ways been risky, but at the same time they have the po­ten­tial to pro­duce large prof­its. For ex­am­ple, be­tween De­cem­ber 2000 and May 2002 the gold price in­creased from $270 to $330 (56% in rand terms), but gold shares on the JSE shot up by al­most 380%.

Apart from shares, in­vest­ments can be made in New­Gold, an ex­change-traded fund that’s di­rectly linked to phys­i­cal gold. As its graph shows, it’s ex­pe­ri­enc­ing a bull mar­ket and its price is cur­rently ly­ing be­low the lin­ear re­gres­sion line in a po­ten­tial buy­ing area. For those who want to stash gold it­self, there are Kruger­rands – which trade at a pre­mium but of­fer the peace of mind that only phys­i­cal gold can.

NEW­GOLD... BOOM­ING

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