MONEY & INVESTING &&e-ffi m&3rL&&&8 Still a safe haven Sold butris insist I hax&8$mm wr&$$ e*sxt$rxaxm a tCI r[se mut, ss i rmeems$mN'x fmmrs I mmme, $s tFxw m*tm$ ; mte$$ thm smfm *xmwrym It once was? l i : For many investors, gold has proved to ; be a valuable safe haven during the i financial crisis and recession. While fi- I nancial markets were falling, the gold I p.ice did well in leading cuirencies and greatly outperformed risky assets such as equities and properg,. However, fears about a financial meltdown have faded in recent months, and hopes for a return to growth next year are rising. I[ this optimism is justi- fied, will gold lose its lustre for many investors as demand for the metal decreases in less jittery markets? Or, could surging inflation rekindle in- vestor interest in gold? Both of these scenarios may unfold in the coming months. Gold may under- perform relative to assets which are recovering, such as equities and other commodities, but it should retain its long-term role as a hedge against in- flation and currency weakness. A lower gold price could also help lift demand from the industrial and jewellery sectors. Gold tends to perform differently, and follow dif- ferent cycles, from most other assets. It has differ- ent roles whose impor- tanee varies, depending on economic and political events. It is always a commodity, used in the industrial andjewellery sectors, and demand from these industries is linked to economic cycles and the gold price. Falling jewellery demand was one rea- son gold did not do better than it did, failing to maintain prices above US$1 ooo/oz in a world financial crisis. Investors see gold not simply as a commodity but as an alternative cur- rency, a hedge against inflation and a 52 rtf{A$!,&*&r- M&rL At.J cusr r4. :*o? li
Transcript
MONEY & INVESTING&&e-ffi m&3rL&&&8
Still a safe havenSold butris insist
I hax&8$mm wr&$$ e*sxt$rxaxma
tCI r[se mut, ssi rmeems$mN'x fmmrs
I mmme, $s tFxw m*tm$
; mte$$ thm smfm *xmwrym
It once was?l
i
: For many investors, gold has proved to; be a valuable safe haven during thei financial crisis and recession. While fi-I nancial markets were falling, the goldI p.ice did well in leading cuirencies and
greatly outperformed risky assets such as
equities and properg,.However, fears about a
financial meltdown havefaded in recent months,and hopes for a return togrowth next year are rising.I[ this optimism is justi-fied, will gold lose its lustrefor many investors as demand for themetal decreases in less jittery markets?Or, could surging inflation rekindle in-vestor interest in gold?
Both of these scenarios may unfold inthe coming months. Gold may under-perform relative to assets which arerecovering, such as equities and othercommodities, but it should retain itslong-term role as a hedge against in-flation and currency weakness. A lower
gold price could also help lift demandfrom the industrial and jewellery sectors.
Gold tends to performdifferently, and follow dif-ferent cycles, from mostother assets. It has differ-ent roles whose impor-tanee varies, depending oneconomic and political
events. It is always a commodity, used inthe industrial andjewellery sectors, anddemand from these industries is linkedto economic cycles and the gold price.
Falling jewellery demand was one rea-son gold did not do better than it did,failing to maintain prices aboveUS$1 ooo/oz in a world financial crisis.
Investors see gold not simply as acommodity but as an alternative cur-rency, a hedge against inflation and a
saf'e haven in economic or political crises.For some investors, gold is always worthholding because they see it as an ultimatestore ofvalue.
How well has gold performed recently?It has certainly done well compared withequities. After peaking in mid-October2OOJ, the Morgan Stanley world equityUS$ index fell by 59% to its low inMarch this year. In the same period thedollar gold price rose by 2S%.
Equities have recently outperformedgold, rising by Ss% from the March low,while gold has risen only B%. Over thefull 2z months since world equitiespeaked, equities are down BZ% in dollarsand gold is up 29%. This included aperiod of dollar strength, as the UScurrency also regained favour as a safehaven, though it's weakening again now.In weaker currencies such as the poundor the rand, gold's outperfbrmance ismuch greater.
"Ifgold is regarded as a currency, ithas been the best performer of its classsince the start ofthe financial crisis,"says Allan Gray portfolio managerSandy McGregor.
SA Bullion MD Hilton Davies saysgold's relative strength goes back to thebeginning of this decade.
After its recent recovery, the JSE allshare index (Alsi) is now down 2O%since mid-October 2OO7. In the sameperiod the rand gold price has gained5O%. Since the AIsi peaked in May 2OO8,local equities are down by 25% and goldis up 7% in rand.
At about Rl 600loz, the rand goldprice is now 287" below its highs inFebruary. For local investors, who investin gold in rand, that reinforces the ques-tion: is there still a case fbr gold?
The gold bulls have little doubt
about this."GoId is firmly established in a strong
uptrend and the fundamentals are ex-cellent," says Davies.
The July Gold InrLestment Digest,published by the World Gold Council(WGC), a producers'body, cites severalbullish arg"uments. These relate tocurrencies, inflation and prices ofother assets.
In June, says the WGC, gold moved ashigh as $981,7916r, coinciding with thequarterly low in the dollar, "which waspressured, among other things, by grow-ing questions about its future as theworld's reserve currency''. Gold remainedsupported, it adds, by increasing signsthat the worst of the global recessionmay be behind us and a correspondinguptiek in investors'fears about futureinflation.
According to a new analysis by theWGC, which examines gold's perfor-mance as a tactical inflation hedge andlong-term strategic asset between 1974and 2oo8, though in the low and mod-erate inflation years real returns fromgold were only mildly positive, in thehigh inflation years it rose in real termsby an average oft4,gyo.
In SA, inflation has remained muchhigher than in the US, but that con-tributes to rand weakness. The rand goldprice rose by 32% in 2OOB; 87% in2006; 31% in 2Oo7; and 4O"/o in 2OO8.So far this year, it's down 2,4/o.
Other research shows returns frommainstream assets such as equities,bonds and cash usually weaken in pe-riods ofhigh inflation. The correlationbetween gold and these assets is rel-atively low, as shown recently.
There is also a long-standing negativecorrelation behveen gold and the dollar(meaning their prices often move in op-posite directions).
This has become more relevant withthe dollar's weakness since March, linkedto rising concerns about the'US fiscaldeficit and US debt.
McGregor says doubts are emergingabout whether the US is in fact afinancial safe haven, and whether thedollar will retain the most importantattribute ofa reserve currency: that itremains a stable store of value.
"Given the large surplus ofcapacityand high unemployment, inflation seemsimprobable in the near term, but when
world economic growth resumes, it couldreturn with a vengeance," he says.
There are also reasons for cautionabout gold.
Aiter more than doubling in recentyears, it may decline as other assetsbecome more attractive. If the worldeconomy keeps recovering, investmentand speculative demand for gold mayweaken but growth may not be strongenough to boost demand from othersectors, such asjewellery except at lowerprices. The world could also enter aperiod of low growth with low inflation.
Supplies ofgold could also rise, pos-sibly through increased sales by central
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banks - though in recent years suliplieshave been declining because ofshrinkingproduction by miners and buying byAsian central banks.
Even on a long-term view of gold's roleas an investment or investment hedge,there have always been sceptics.
When Milton Friedman, the highpriest of monetary economics, visited SAin1S16, he said: "Historically, gold hasnot proved a very good hedge againstinflation . . . as oftoday, gold is a highlyspeculative commodity whose price maygo anlnvhere depending on speculation."
Yet gold today does have a strong andgrowing following based on its reputationas a protector ofpurchasing power and aportfolio diversifier. This requires astrategic view. Forecasting its price over12 months is always tricky.
Local investors who want to gain ex-posures to gold can do so in several ways,including an exchange traded fund(BTF), direct purchases ofphysical gold,coins or gold shares.
Absas NewGold, the JSE-Iisted ETRoffers direct exposure to gold through aliquid financial instrument. Its price di-rectly reflects the rand price of gold.
SA Bullion offers investment productsthat give investors full ownership, atwholesale market prices, of physical goldstored in the Rand Refinery. With theseproducts, investors can avoid thecounterparty risk linked to ETFs.
Krugerrands are another form ofphysical gold ownership, but these areavailable only in limited quantities andcan be difficult to store or transport.
Gold miners'shares are another op-tion, but they carry other risks, includinghigh costs and declining production. Theshares have often underperformed thegold price. Andrew McNulty
investor" in RusoroMining, which hasmines in Venezuela,with a z6% stake.
Though based inVancouver, Rusoro isbacked by Russianmoney. Holland con-firmed last week thatGold Fields is deter-mined to hang ontothat stake. The com-pany sees it as a long-term option onVenezuela, and itshould be a good one.Chavez has declaredRusoro the govern-ment's preferred part-ner in developing goldprojects there.
In any case, Hollandsays, the company'sshare price hasn't ex-actly been ablaze oflate. The stock is hov-ering around C$4,oc,off a year high of$1,O4.
"There's no rray weare going to sell thatcompany at this price,"he says. 'We'll put it inthe bottom drawer . . .
there's no reason to tryto sell it."
Gold Fields pickedup the Rusoro stake in2OOf, when it swappedits Venezuelan ChocoIO mine for the com-pany's scrip. Rusoroannounced last monthit had started a studyto li{t Choco lo's pro-duction to more than5OO OOO ozfyear after
?nno
Addirrg ouncesVenezuelan president Hugo Chavezmay be disliked in mining circles becauseof his nationalisation of resources assets,
but you won't hear a bad word about himfrom Gold Fields CEO Nick Holland. Forgood reason: Africa's second-biggest goldproducer is what Holland calls a "passive
2012,from the current 17O OOO ozfyeatThis would make it one of the world'sbiggest gold mines.
Holland's resolve to keep Rusoro is incontrast to Gold Fields'move in June togive up its stake in Chinese miner SinoGold. The Johannesburg-based company
