City: Gold rush will end in metal fatigue

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The Independent Online
WHAT two things do George Soros, Sir James Goldsmith, Jim Slater and Lord Rees-Mogg have in common? Answer: they are all super bulls of gold and they are all, I believe, completely wrong about it. Sir James is 'a colossal bull of gold' while Mr Soros, who last week bought a 13 per cent stake in Newmont Mining from Sir James, is also openly proclaiming his love affair with the metal. Both Mr Soros and Tudor Jones, another of the new breed of highly active investment gurus now establishing themselves on Wall Street, have recently turned dramatically bearish of equities and bonds. Gold, they believe, is one of the most alluring alternatives.

Superficially at least, the gold market now looks more attractive than at any time in the past 13 years. Certainly it is back in fashion in a way not seen since the heady days of 1980, when the price hit an all-time peak of dollars 850 ( pounds 541 at current exchange rates) an ounce. Suddenly everyone in the City is talking about it again. Ah, the glitter of it, the feel of it - who needs shares and bonds when there before you is the world's oldest currency selling at knock-down prices?

But beware. This is a treacherous, volatile market dominated by ruthless and unscrupulous operators. It is also a relatively small one and is, as a consequence, easily manipulated. Those who don't know what they are doing get burnt. It is all very well for Sir James and Mr Soros to preach the gospel; they've already got their positions and it's as much book talking as anything else. Still basking in the glory of last year's dollars 1bn gain at the expense of the pound, Mr Soros has acquired such a reputation that everything he says seems to become a self-fulfilling prophecy. Don't forget, however, that he is in truth just another speculator - and in the tradition of great Hungarian speculators, he's as capable of getting it wrong as right. He read Black Wednesday like a dream, but he lost a packet in the crash of 1987.

But let's assume for the moment that he is right on gold. Short-term at least, there are some good reasons for being mildly bullish. The steady drip- feed of Russian gold that depressed the market for so long now seems largely to have been stemmed. Demand is once again outstripping supply. The Chinese, whose cultural and emotional attraction to gold has always been stronger than most, have also been buying gold as never before. Finally, commodity prices generally are close to their lowest levels in real terms since records began; the law of averages alone would seem to dictate that it's time for an upward correction.

But the idea that we are in for some kind of prolonged bull market similar to the one in the 1970s strikes me as utterly ridiculous. Over the past few months, Far Eastern interest seems to have petered out. The latest rally in gold up through the dollars 350 mark is a largely speculative phenomenon, driven primarily by the big New York commodity funds. Outside the Soros hype, nothing has changed fundamentally for this metal. It still makes beautiful jewellery, but other than that and a few obscure industrial processes, it is no less an entirely useless commodity now than it ever was; it wouldn't require much of an uplift in the price for central bankers, with their vast reserves of bullion, to start selling again.

Oh, but we live in troubled times, the gold bulls say, and gold has always been a safe haven when the going gets tough for other investments. Furthermore, we are entering a new age of inflation against which gold has traditionally been a good hedge. Hogwash. Times are no more troubled now than they ever were. Certainly they are a good deal less troubled than at the time of the Gulf war, when Armageddon was being widely predicted and the price of gold actually fell. Nor is it easy to see Western governments wholeheartedly abandoning the anti- inflationary policies of recent years.

The factors that led to the bull market in gold during the 1970s are entirely absent today. For nearly 40 years, the price of gold was artificially held at dollars 35 an ounce, a figure picked at random by President Roosevelt and defended to the last. There was a tremendous release when the benchmark was finally abandoned in the early 1970s, an effect accentuated by the oil shock and the subsequent great inflation. These were altogether exceptional circumstances, highly unlikely to be repeated. Capital markets and flows have changed out of all recognition since then. Financial markets today are much more sophisticated. Why invest in incomeless gold when you can get cast-iron security yielding a real rate of return elsewhere? The present climb in the gold price may have a little further to go, but somehow I doubt we are talking about a long-term bull market here.

Tennant's extra

WIND the clock back to March 1987 when Sir Anthony Tennant was persuaded to become chief executive of Guinness. Those were dark days indeed for the company. Racked by scandal, its core executive team sacked for gross misconduct, threatened on all sides by litigation, its corporate name reduced to little more than a laughing stock, its staff miserable, confused and disillusioned - you could argue that non-executives were lucky to attract a professional manager of Sir Anthony's calibre. Even then he was seen as perhaps one of the top three or four executives in the industry (in the world, that is, not just Britain), having already established Grand Metropolitan's IDV as one of the leading international liquor companies. One of his demands was that he be given an index-linked pension equal to two-thirds of his leaving salary. If non-executives had stopped to think about it, they might have considered this a bit steep since Sir Anthony's stay was unlikely to exceed five or six years. But under the circumstances, they weren't going to quibble.

Well, here we are six years later and thanks to a decision by the remuneration committee to boost Sir Anthony's basic salary in his final year from pounds 625,000 to pounds 777,000, he now stands to receive an annual pension of pounds 500,000 for the rest of his life - index-linked, that is. Sir Anthony is in good health and can be expected to live at least another 15 years. Though he has funded part of the pension himself, it's going to end up costing Guinness at least pounds 5m and possibly a lot more. By any standards, that is an extraordinarily large golden goodbye.

Guinness is a big company; pounds 5m is a drop in the ocean against its costs and stock market value. There can also be few more deserving cases than Sir Anthony in British industry. After the Distillers takeover, Guinness was always going to be something of a gold- mine. Jimmy Gulliver used to describe Distillers as 'a bank' waiting to be raided. All Guinness had to do was buy in the distribution network, rationalise the Distillers brands and sort out its demotivated, federal management structure and it had one of the strongest liquor companies in the world. Nevertheless, Sir Anthony alone, through his tie-up with LVMH and his sharply focused, highly professional management style, can perhaps be said to have added an extra couple of billion pounds of shareholder value to the company.

To most people, however, pounds 500,000 a year as a pension verges on the outright greedy. Sir Anthony was able to share in the wealth he created through a highly generous share option scheme, and his salary and perks were good by British standards, if not American. Going-away presents of this type - for that's what such pension arrangements amount to - are hard to justify in any circumstances.