Money: Mining firms left black and blue by gold

TAKE a look at the price of gold compared with 12 months ago and it is difficult to understand what all the fuss is about.

An ounce of gold goes into the new millennium costing about $285 (pounds 178), pretty much what it was worth at the end of 1998. However, like the beguiling serenity of a water-bound duck, the underbelly of this year's apparently static gold market has been the scene of frantic trading. Next year promises more of the same.

The year began as bearishly as the past 20 have done, continuing the negative trend that had already wiped out more than half the precious metal's value since 1980. This culminated in a summer low of $253.

Gold's status as a traditional hedge against inflation has been tarnished by the rock-solid price stability enjoyed around the globe, prompting central banks to reconsider their attitude to their bulging vaults.

Why sit on a depreciating asset that pays no interest when US Treasury Bonds are just as safe and at least provide the luxury of interest payments?

Even most of the world's gold miners were resigned to further price falls. So much so that they took out billions of pounds' worth of complex derivative transactions with a number of London-based investment banks.

Thanks to these feats of financial engineering, the companies that extract gold from the ground perversely stood to prosper if the devaluation persisted.

But it didn't. One Sunday in September, officials from 15 European central banks agreed to a moratorium on central bank selling. To say the market was caught unawares would be an understatement, and in the next three days the price jumped 18 per cent. An ounce was soon trading at $330.

Many of the gold-mining companies that should have been celebrating the recovery were left to lick their bearish wounds. Ashanti, the Ghanaian producer, suffered losses on its derivative contracts of $450m and was forced to contemplate a life-saving merger with Lonmin, the UK miner, although the deal remains unresolved.

For every $1 lost by hapless companies such as Ashanti, however, there was $1 of profit for the investment banks which sold them the derivatives products. The miners' pain would have been worth while had the moratorium sparked a sustained appreciation of gold. Three months on, however, the price has slipped back below $300.

"Gold is entering a new error, not a new era" is the tart verdict of Andy Smith, an analyst at Mitsui Commodities. He points out that the moratorium has not stopped further central bank gold coming on to the market - competition that beleaguered producers could do without. "Some miners will go out of business," Mr Smith predicts. "How low will the price go? Think of a number."