By Giles Parkinson
Sydney view
If you blinked last week, you may have missed something quite unexpected. A surge in the price of gold bullion through $US328 an ounce - a level it had not visited in more than two years.
The trading of gold bullion, since its thrust through $US1000 in the early 1980s and its subsequent retreat, has been extremely dull. Price variations of even $US3 are noted with banner headlines. Breakdowns through key resistance levels are marked with the foretelling of doom.
What, then, was the world to make of the extraordinary scenes last week after European central banks announced they had agreed not to sell more gold bullion than they really needed to over the next five years.
The reaction was best summed up by the cigar-chomping investment guru Rene Rivkin, who received a message on his beeper and interrupted a panel discussion at a Sydney conference with the words: "For those of you in the audience who are Jewish, gold has just gone through $US280 an ounce."
And it didn't stop there. Within 12 hours, bullion had leaped to its two-year high of $US328 - sending beepers throughout the world into a frenzy and delivering a gain from the previous week's level of nearly 30 per cent.
Those beepers may finally have expired in the excitement of the ensuing 24 hours, when the gold price vaulted wildly between $US329 and $US285, and sent shares in goldmining companies in Australia and South Africa along a similar course.
The gold sector sprang back to life. Company share values doubled in a single day. Even heavyweight companies such as Normandy Mining jumped by more than a quarter.
Some companies were extremely quick to cash in on the metal's sudden and dramatic change of fortune. Vengold, with just weeks left for it to pay a crippling debt inherited through its purchase of shares in Lihir Gold, managed to wipe its liabilities in a single stroke with the sale of only half its stake.
The sudden change in psyche towards the metal is crucial for the future of the industry, and the health and wealth of its investors.
Gold, once a monetary standard in itself, has increasingly been considered to be little more than another commodity on metal exchanges across the world.
The decision of the central banks in Europe will not refloat the metal to its former glory, but it does redress the balance between demand and supply and with a single stroke remove the major reason for its fall from grace over the past three years.
Now, forecasts of a recovery towards $US350 an ounce may not seem so far-fetched as they did at the Diggers and Dealers conference in Kalgoorlie a few months ago, where no one dared mention that hope in the official speeches but kept it alive in the backrooms and the bars.
For now, however, gold analysts in Australia are trying their best to keep matters in perspective. Most are predicting bullion to hang around the $US302 an ounce mark, where it finished the week, but some are brave enough to say it will creep back up towards $US320 and beyond.
Translated into Australian dollars, that puts most of the goldmines that have survived the past two years back on a strong economic footing.
The only losers from the week's excitement were the overseas-based hedge funds, which usually make squillions out of financial instruments of their own making.
When they come undone, however, the results can be ugly. That's what happened this week and explains the huge volatility in the market.
The hedge funds had invented for themselves something they called the gold carry trade, which meant they borrowed gold from the central banks at nominal interest rates and reinvested the money in the more lucrative bond markets.
They were also busily selling the market short, meaning they were convinced the gold price would continue to fall and they could buy back into the market at a lower price.
The central bank announcement put the spanner into that idea, and for once it looked as if the hedge funds were the ones doing the panic trading.
* Giles Parkinson is deputy editor of the Australian Financial Review.
Markets react to gold's old lustre
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