Guarded op­ti­mism

Ev­i­dence that metal as a phys­i­cal in­vest­ment re­mains ro­bust as ever

Finweek English Edition - - News -

IF IT’S CER­TAIN COM­FORT gold in­vestors are looking for they’d bet­ter not seek it from Jes­sica Cross – not right now, at any rate. “The gold price should have moved but it hasn’t yet. I don’t know why. I just know it will.” Since the bank­ing cri­sis erupted ear­lier this month, gold had moved from around US$740/oz to $900/oz on 29 Septem­ber but has since dropped back to around $840/oz at the time of writ­ing.

Cross, chair of VMG, a met­als and com­modi­ties con­sul­tancy, is as con­founded as most that gold didn’t more sharply re­act up­wards in the wake of the global credit cri­sis. Even though it has re­sponded some­what lately, it has not yet tested $1 000/oz af­ter sug­gest­ing it might last week.

As usual, the rea­sons for gold’s ac­tiv­ity are man­i­fold. On the one hand, global liq­uid­ity has evap­o­rated. Those with sig­nif­i­cant hold­ings in gold have liq­ui­dated their po­si­tions to cover ex­po­sure else­where. And with in­vestors hold­ing on to cash not much of it has found a home in gold, which it nat­u­rally should dur­ing pe­ri­ods of cri­sis.

Lease rates have also shot up, be­cause no­body wants to give away gold – much less lend any­thing. How­ever, that – and the at­ti­tude to­wards gold – could be chang­ing, says Cross. “What’s in­ter­est­ing is the long po­si­tions on Comex, which in­creased 154 t in the week of 23 Septem­ber. Th­ese are wor­ried guys; very wor­ried peo­ple.”

So why the op­ti­mism? Cross says in­vestors will start looking with fresh eyes at the fun­da­men­tal po­si­tion the gold in­dus­try finds it­self in. For all the mil­lions of ex­plo­ration dol­lars ploughed into Africa, South Amer­ica and Aus­tralasian tar­gets, very few world-class de­posits have been dis­cov­ered.

Also cramp­ing sup­ply is the pos­si­bil­ity the Wash­ing­ton Agree­ment, in which a cap was placed on cen­tral bank gold sales, is likely to be re­newed this year. “The In­ter­na­tional Mon­e­tary Fund wants to sell more gold,” Cross says.

De-hedg­ing, the process whereby gold min­ing com­pa­nies ac­cel­er­ate the de­liv­ery of gold into con­tracts, has dried up, re­sult­ing in the metal be­com­ing scarce in the open mar­ket.

On the de­mand side there’s ev­i­dence gold as a phys­i­cal in­vest­ment re­mains as ro­bust as ever. Buf­falo coins – gold in­vest­ment pieces pop­u­lar in the United States – have dried up ow­ing to strong buy­ing. In­vest­ment jew­ellery de­mand in cer­tain ar­eas where there’s po­lit­i­cal stress, such as in Pak­istan, is also good.

Iron­i­cally, in­vestors in gold eq­ui­ties – in line with all other eq­ui­ties – may con­tinue to strug­gle, says Cross. She even raises the pos­si­bil­ity that fall­ing pro­duc­tion pro­files will force gold min­ing com­pa­nies to con­sider a new round of con­sol­i­da­tion. “The gold price is ris­ing but gold min­ers’ costs are so high.” Mar­gin pres­sure is un­likely to usher in a pe­riod of un­bundling, whereby gold pro­duc­ers chase mar­gin rather than vol­ume of gold sup­ply. Says Cross: “The per­cep­tion among man­age­ment is that this isn’t what share­hold­ers want.”

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