Evidence that metal as a physical investment remains robust as ever
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.”