A golden opportunity

With gold bullion going 'dirt-cheap', John Burke assesses its prospects

You may pay handsomely for a gold ring or locket, but nobody is making their fortune out of the yellow metal itself. Mining it has become poor business since 1980 when gold soared to almost $850 (£595) per ounce. Last year, gold dipped from $281 to $271, a classic opportunity to scrape the bottom.

You may pay handsomely for a gold ring or locket, but nobody is making their fortune out of the yellow metal itself. Mining it has become poor business since 1980 when gold soared to almost $850 (£595) per ounce. Last year, gold dipped from $281 to $271, a classic opportunity to scrape the bottom.

The pension fund for Dutch clergymen, PGGM, has started to invest in the yellow metal after a poll found that 73 per cent of Eurolanders want more gold to back their central banking system. A gold commemorative Deutschmark is being struck for nostalgic Germans, but Professor Robert Mundell at America's Columbia University has called for a golden Euro and another gold coin for circulation worldwide.

Also in the USA, where E-Gold takes internet payments in the precious metal, the Federal Reserve's veteran chairman, Alan Greenspan,repeated last year what he said in 1962: "Gold still represents the ultimate form of payment in the world". Much bullion should remain in the vaults of central banks, after the 1999 Washington Agreement to limit selling. So demand continues to outstrip supply.

Extracting nuggets is so hard that the world's stock of 135,000 tons would comfortably fit into the Millennium Dome. Another golden opportunity missed! The annual addition barely reaches 2 per cent from mines in 10 countries that produced 2,600 tons last year.

Central banks sold less than 400 tons, including 25 tons by the Bank of England back in November. But goldsmiths alone bought 3,100 tons, including recycled scrap from customers and industry.

Overall demand was rising by a record 11 per cent at the end of last year, partly due to gold's increasing usefulness in healthcare, aerospace, electronics and ecology.

But the main point is the hoarding of coins and bars by the Arabs, Indians and other Asians, although the most glitzy market is in 24-carat jewellery anywhere between Manhattan and Hollywood.

Yet film stars, oil sheikhs and rajas do not make the price jump. What matters is that the gleaming metal, although quoted daily in dollars, always moves in an opposite direction to the pound and index. And economists, doubtless including Prof Mundell, believe the almighty dollar is at risk from the USA's external deficit and declining economy, coupled with a fall on Wall Street.

The combination of scenarios is not limited to the USA. These range from a war in the Middle East or a monetary crisis in Euroland to an earthquake under Tokyo or trouble in eastern Europe. Any could trigger a sale of shares everywhere. That is why the World Gold Council (WGC) in London's Haymarket always recommends bullion as a hedge against bad times.

Robert Weinberg, head of WGC's institutional sales, warns: "As in 1928 or 1965, it is a mistake to assume that past trends will continue on capital markets. Everyone should keep some gold - and the next step could possibly be gold-backed convertible bonds."

Customers might order gold from banks, but the WGC wants to ensure general availability. Its brochure, A Guide to Investing in Gold, lists such coins as the krugerrand and Australian dollar. Sovereigns too can be bought at specialised dealers such as Baird & Co or Gold Investments in the City.

The EU removed VAT a year ago, so alternative outlets are gold shops near the Paris bourse (the French still hoard the 20-franc piece called a Napoleon). Swiss banks loveselling gold as much as Swiss burghers love buying it, but the world's cheapest bullion bazaar is Dubai.

Visitors to the Yukon Territory can pan for gold outside Dawson City for a $10 stake. There are also more than 30 quoted mining stocks such as Placer Dome in Canada and Newcrest, Australia. Their main lure is consolidation - the biggest example being AngloGold in South Africa - to remain profitable.

Gold options and futures are traded in New York and São Paulo, but less risky is a unit trust such as M&G Gold that recently diversified. Although it has declined by one-fifth since its 1983 launch, there have been five sharp upturns that added more than 40 per cent to the original price.

So gold bugs, beware! Investing in gold, physical or indirect, will always be highly speculative.

Comments