Precious metals: Going for gold

Reports of an end to the boom in the precious metal seem premature, with the price soaring and investors rushing back. by Tom Bawden
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The Independent Online

The buzz generated by a rumoured deal between the London-listed Russian gold giants Polyus and Polymetal yesterday said it all – the precious metal is back. As gold jumped by 1 per cent to a six-week high of $1,719.89 an ounce and the FTSE-listed miners Petropavlovsk and Kazakhmys each reported strong precious metal figures, the recent disillusion with gold suddenly seemed very far away.

"Precious metals have taken off," Barclays Capital said in a note, as gold prices responded to a Federal Reserve pledge on Wednesday night to keep interest rates at rock-bottom levels for at least two more years.

Furthermore, the Fed signalled that a third round of quantitative easing – in which the US government would pump billions of dollars of taxpayers' money into the economy in the hope of stimulating trade – may be in the offing.

Both measures are rocket fuel to gold prices.

Low interest rates allow investors to borrow money cheaply to buy the bars and make alternative investments such as bonds less attractive by keeping yields low.

Meanwhile, a further round of quantitative easing threatens to push up inflation. Gold is traditionally seen as a hedge against rising prices.

If that wasn't enough to push investors into the safe haven of gold, there is also a psychological driver – the fact that the US government is considering such radical action shows it must be really worried about the economic outlook.

So all those investors who have been piling into US dollars in recent months, thinking the gold price too high and hoping that the American economy was on the rebound, are wondering whether they've missed an opportunity to snap up the precious metal at relatively low prices.

The price of gold, which stood at $272 an ounce at the end of 2000, has risen steadily in the past decade, rising especially fast in 2010 and the first nine months of 2011 to hit a record price of $1,920 in September.

Then, the market suddenly seemed to fall out of love with it. Like a host of other commodities that had recently hit record prices, gold slid in the final few months of last year to stand below $1,550 an ounce by the end of the year.

The gold price is now halfway between and it could exceed $2,000 an ounce to hit a new record this year or in early 2013, according to the Thomson Reuters GFMS gold survey last week.

David Jollie, a strategic analyst at Mitsui & Co Precious Metals, agrees we could be in for a record this year since the underlying drivers of the gold price remain.

"When you have a long unbroken run of price rises you are going to have corrections. But we still have concerns about inflation in China, the health of the eurozone, the erosion of the purchasing power of the dollar.

"It's a difficult investment environment in general, which increases gold's appeal as a safe haven.

"Real-estate prices haven't done well, equities are volatile, making commodities and gold in particular attractive," Mr Jollie said.

"We expect the price to continue to rise, with a large amount of volatility and we could have a new nominal record this year," said Mr Jollie, adding that central banks in Asia and South America are heavy buyers of gold.

Jeffrey Currie, an analyst at Goldman Sachs, said in its latest commodities report this month that he views "gold and copper as providing the best-value opportunities" this year for investment and said it expects the precious metal to reach $1,940 an ounce in the next 12 months, putting it a whisker ahead of the previous record.

Petropavlovsk, the Russian gold producer formerly known as Peter Hambro Mining, yesterday reported a 24 per cent rise in gold production to a record 630,100 oz for 2010 and said it expected to increase volumes by a further 11 per cent this year.

"2012 is poised to be another milestone year in the development of the group," said Petropavlovsk chief executive Sergey Ermolenko.

Kazakhyms reported an 11 per cent jump in gold production for the fourth quarter, compared with the previous three months.

Against this backdrop it is hardly surprising that the reported merger talks between Russian presidential candidate Mikhail Prokhorov's Polyus Gold and Polymetal, whose owners include the Czech billionaire Petr Kellner and Russia's Alexander Nesis, generated such excitement yesterday.

As it happens, the companies denied any talks were taking place. But that may not be the end of the story. The reports suggested that the talks were not formal – and were taking place between the companies' biggest shareholders rather than their managers – so a deal could still emerge.

Either way, the excitement is an interesting barometer for a gold industry that looks to have a bit of steam left in it.

Commodities surge: Caterpillar profits up

Gold isn't the only commodity on the rebound as Caterpillar's fourth-quarter results demonstrated clearly yesterday.

The engineer posted a 60 per cent surge in profit, its biggest since 1947, on the back of an 80 per cent rise in sales of mining equipment as miners gear up to extract ever larger quantities of commodities.

And Caterpillar chief executive Doug Oberhelman expects the trend to continue, saying: "We're expecting 2012 to be another year of good growth."

After tumbling from record highs in the final few months of last year, a host of commodities seem to be on the rebound.

Copper, nickel, tin, lead and zinc have risen by a least a tenth this year on hopes that the global economy is improving.

Anglo American reported yesterday that it increased copper production by 10 per cent in the fourth quarter of 2011 while iron ore output rose by 5 per cent. It also increased production of metallurgical and thermal coal and nickel.

Meanwhile, Lonmin reported a 24 per cent jump in platinum production to 113,950 ounces for its fiscal first quarter, the final three months of 2011.