Oil dollars boosting gold
Gold Fields will be a major winner if price increases sharply this year
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.