Gold, seen for a generation as the Cinderella of the financial community, rallied last week and reached hit an all-time high of $897.65 last week, surpassing its previous best of $850 an ounce – a level last seen in January 1980. In 2007, a gold investor would have enjoyed a 32 per cent gain on top of the 20 per cent-plus increases seen for most of the previous five years. If gold is indeed Cinder-ella – and the equity and bond markets perhaps the two ugly sisters – then we have a very good idea who should be going to the ball in 2008.
Assessing gold is complex because, like no other asset class, it has a fantastically wide yet powerful number of drivers – economic, geopolitical and, not least of all, gold's own supply/demand fundamentals. The first two are well reported and the outlook for both in 2008 is constructive for gold – with increasing inflationary concerns added to the "plus" column but offset by prospects of a more doveish White House foreign policy late next year. If gold is indeed the barometer of the world economic mindset, then the mercury is running high and it suggests greed has given way to fear, in spades. But these factors alone do not fully explain the big change in gold's fortunes.
Looking for the "glass slipper" that provided the turning point is relatively simple. In a nutshell, two important things happened simultaneously. First, gold became available to many institutional investors for the first time. Second, this coincided with some of the most powerful reasons for buying it.
Pre-2000 gold traded through a number of exchanges that could be described as opaque off the radar of most pension funds and retail investors. It was said that if there were £1,000 to invest, then a mere £3 went to commodities - and gold is a subset of that. However, the launch of exchange-traded funds (ETFs) 18 months ago has made gold available to investors through more familiar markets,such as the London Stock Exchange and the New York Stock Exchange. This has opened a major conduit and precipitated the slow glacial movement of pension fund money into this asset class. Added to this has been the launch of new gold exchanges across a broader geographic jurisdiction, in countries with a strong cultural affinity for gold yet constrained by the lack of a suitable local market (including China, Dubai, India, Pakistan and Vietnam). The cork was out the bottle but the genie yet to appear ...
Gaining easy access to gold was important but a strong reason to buy gold essential – and it was the shift in the supply/ demand balance that signalled the flow of funds through these freshly forged conduits.
There has been much talk of "peak oil" – but the same applies to gold. Global goldmine production peaked in 2003 and is in gradual decline. The problems are perhaps best typified by the world's largest producer, South Africa, where mines face declining ore grades and rising costs as they push the extremes at depths of 2.5 miles down. In 1970, South Africa produced 1,000 tons of gold, but by 2007 it had fallen to a quarter of this level. Where new mines have been identified, producers have been beset by red tape, resource nationalism and Aids (afflicting roughly a third of mineworkers). In short, new deposits are not being found or developed to replace the ageing and largely depleted mines.
In former years, higher gold prices would have been met by the choking off of jewellery demand and increased producer selling. But market participants are now so confident of the strength of the bull run, as jewellery demand has not eased significantly, that prices have run higher, reinforcing the mindset for further gains.
So what does this year have in store? The gold chart up to mid-2007 was "constructive" before going exponential. The-BullionDesk.com forecasts an average price of $976 in 2008 with a possible high of $1,250. But like the fairy godmother in Cinderella, we urge caution, while believing that like all good stories this one has the legs to run.
The author is a director of TheBullionDesk.com, an online source of precious metals news, prices and research. firstname.lastname@example.orgReuse content