The rush is over for the ever-ready gold bugs

COMMENT

Say what you will about gold bugs, one thing is certain; you can't stamp them out. The sudden surge in the gold price this year to a five- year high has brought them out of the woodwork again with a vengeance. For inflation hawks, a soaraway gold price is a sign of trouble ahead. For commodity buffs, it is a sign of gains to come. In reality, the rise of over $20 in January to breach the $400 barrier is likely to be a speculative spike. If you haven't already made your pile out of this admittedly seductive metal, don't bother. You've missed the boat.

The main physical markets that move the gold price nowadays are in the developing world, particularly the Far East, where consumers buy gold in high carat jewellery as a hedge against political uncertainty and high inflation. According to the World Gold Council, demand grew sharply in 1995, hitting an all-time high in the developing world in the third quarter.

But then there are statistics and statistics. According to Andy Smith, precious metals analyst at UBS, demand fell sharply in key Far Eastern markets between the first and second halves of 1995. Meanwhile, South Africa stepped up its sales in a big way. He calculates that the resulting shortfall in demand over supply was as high as 500 tonnes, or a sixth of total annual demand.

Even if the fundamentals of physical demand and supply were more promising, the overall economic background casts a long shadow over those hoping for a return to the glory days. Sixteen years ago, the price of gold peaked at an all-time high of $850 an ounce. But that was after the second oil price shock and accompanying surge in global inflation. The disinflationary1990s could hardly be more different from the inflationary 1970s. Then, inflation surprised by surpassing expectations, now it surprises by coming in below expectations.

With real interest rates uncomfortably high - rather than negative as they were in the 1970s - there is no point in holding gold other than the hope of piggy-backing off the speculative fun of the big American hedge funds. A further problem is posed by the massive overhang of central bank holdings - worth 12 times annual gold purchases. Fortunately for gold bugs, central bankers are a cautious lot, as disinclined to dump their hoard on the open market as they are to add to it. Even so, these holdings amount to a powerful buffer to the gold price the moment it moves much above $400. Anyone hoping for a continued gold rush is looking for fool's gold.

Hot air does not mean Branson has won

Hot air alone, even when it comes all the way from Marrakesh, will not be enough to win Richard Branson the franchise to build and operate the high-speed Channel Tunnel rail link, the choicest and biggest project so far to emerge from the Government's all-singing, all-dancing Private Finance Initiative.

That doesn't stop him hoping, however. As Mr Branson ascends into the stratosphere in his round-the-world balloon, we are being subjected to a customary blast of the stuff. Yes, we've won, he announced in the weekend press on behalf of the Virgin consortium, London & Continental Railways, and you never know, he may be right. The problem is, he usually isn't in cases like this. There were similar claims ahead of both the National Lottery and Channel 5 franchises. Poor Mr Branson. He is the perpetual bridesmaid, bidding for everything half way decent that falls from the Government's lap, but somehow or other never making it to the altar. Is he finally going to get there this time?

Certainly he is in with a better chance than ever before, if for no other reason than that there are only two bidders left in the race. But he is not yet there, according to the Department of Transport yesterday. Eurorail, the rival consortium (BICC, Trafalgar House, Seeboard, HSBC and NatWest), also believes it has won. The truth of the matter is that no decision has yet been taken, though one is imminent. The Virgin consortium has got marketing know-how and some experience of operational transport systems going for it, but its financing looks on the dodgy side.

As for the claim that London & Continental will be leapfrogging its way into the FT-SE 100 with a project-funding stock market float, anyone with Eurotunnel tucked away for a rainy day at pounds 10 a share knows it will not. Coming from a man who when he took Virgin private eight years ago swore blind he would never again have anything to do with the City and the stock market, it is also a bit rich.

But he may win, who knows? One thing is for sure, however. It won't be done on the back of a swashbuckling press campaign. With anything between pounds 1bn and pounds 2bn of public money at stake, ministers are not going to allow themselves to be swung by sentiment alone. Eurorail also has its drawbacks, not least that it is the contractor-dominated consortium of the type that originally gave birth to Eurotunnel. But provided it comes up with a credible bid involving the higher transfer of risk from public to private sector and the lower level of public subsidy, it will beat Mr Branson, whatever his charms.

German bankers can't stay away from the City

Those German bankers just cannot keep their fingers off London. Yesterday's purchase of Panmure Gordon, the stockbroking firm, by Westdeutsche Landesbank may be modest when set against the vast sums Deutsche and Dresdner are pouring into the City to set up bases from which to pursue their global investment banking ambitions. But it is very definitely in the same mould, underlining London's pre-eminent role as the financial centre of Europe.

Notwithstanding the tribulations of the Stock Exchange, the fact is that as far as international investment banking is concerned, the City is thriving. London is still in effect the only place in Europe with a dynamic deal-making financial culture, and despite the advances made by rival Continental bourses, a proper feel for equity markets. This is the Achilles' heal of German bankers, who still only feel at home with debt. Panmure Gordon is very much a second division broking player, and largely UK focused. But its size fits in neatly with WestLB's more targeted style of expansion, and should provide a solid base for a Europe-wide equities strategy.

As the third-largest German bank,WestLB does not suffer from any shortage of cash. But unlike Deutsche and Dresdner it does not see itself as punching with the Wall Street giants. It wants to build a more specialised international investment banking business.

For Panmure this should be good news, providing the capital fire-power for expansion. The financial clout was also there with NationsBank, the previous owner, but the sense of strategic development was not. The price involved, believed to be around pounds 35m, is peanuts for a business of NationsBank's size, but it can now concentrate on building up its preferred capital markets business in London.