Going for gold

By MARK FRYER

Amid the deluge of gloomy financial news from abroad, a ray of light has been shining from an unexpected quarter.

The source of the good news? Gold - a commodity that, until recently, had well and truly fallen out of fashion among investors.

Last year, as most sharemarkets were falling, the price of gold climbed from US$279 ($510) an ounce to US$348, a gain of almost 25 per cent.

This year the climb continued, reaching more than US$380oz in late January. While the price has since fallen, it's still about 23 per cent higher than it was at the start of last year.

Shares in many gold-mining companies have gone along for the ride. Some Australian miners such as Newcrest, Croesus and Troy posted impressive share-price rises last year. Like gold itself, all three have since given back some of those gains, but remain well ahead of where they were at the start of last year.

Those gains have been all the more impressive against a backdrop of ever-diminishing returns on overseas shares; while gold was rising last year, the S&P500 index, which covers a wide variety of US shares, fell 24 per cent.

Gold's new popularity has not gone unnoticed. The price rise has prompted articles in such sober business publications as the Wall St Journal and the Financial Times, recounting how some disenchanted sharemarket investors have turned to gold instead.

According to a story in the London Times in January, investors are buying gold "by the rucksack".

Local dealers paint a mixed picture. While some say investment gold sales have not changed, others report growing interest in gold coins and bullion.

"I've been in the business 20 years and it's just amazing," says Clare Goldsworthy, manager of bullion dealers AGR Matthey. "People are just unsure where to put their money."

The reasons for gold's rediscovery aren't hard to find. In a word: uncertainty.

Gold has traditionally been considered as a "store of value", a place to put your money when times are uncertain and other investments look risky.

Right now, the prospect of war in Iraq is the most obvious source of uncertainty, but it's not the only factor that has driven gold prices higher.

Among the other pieces of bad news that have been good news for gold: corporate scandals, particularly in the US, three years of falling international share prices, shaky economic prospects in the US and Europe, concerns about banks collapsing in Japan and Argentina, and a weakening US dollar.

Low interest rates help gold, too. After all, investors who put their money into gold instead of, say, government stock, aren't missing much in the way of interest payments.

Some gold enthusiasts also argue that the precious metal has been rising because the US will soon be forced to start printing more money to pump up its sagging economy. That will further push down the value of the greenback, goes the argument, which means the value of an ounce of gold, as expressed in US dollars, will rise.

The World Gold Council, which promotes gold on behalf of producers, says the price rise of the past year or so "largely reflects the fact that the professional investor has returned to the use of gold as a risk-management tool". According to that argument, Western investors in the buoyant 1980s and 1990s forgot the virtues of gold, but since things became sticky on the financial markets they have rediscovered the metal, which has always had a strong following among investors in the Middle East, India and Asia.

Gold Fields Mineral Services, a large, London-based precious-metals consultancy, is not persuaded by that argument. It puts the rise down to a small number of wealthy buyers, rather than mass purchases by ordinary investors.

The company also warns that a lot of the investment demand for gold is driven by the hope of making short-term profits.

Whatever the argument, some people are obviously convinced that gold offers a refuge from the world's financial woes.

But while the reasons for gold's new appeal are easy to see, so are the reasons to be cautious about jumping on the bandwagon.

In the words of investment research and ratings company Standard & Poor's, "once greater economic and geopolitical clarity is obtained, gold could be as volatile on the downside as it has been on the upside".

In other words, a little good news - on the war front, from the sharemarkets or the wider economy - and gold could fall as fast as it has risen.

The Australian Bureau of Agricultural and Resource Economics (Abare) forecast this month that gold prices could briefly hit US$400oz or more if war breaks out.

But, assuming that the war is not a long one, and tension over North Korea doesn't get any worse, it expects prices to ease as investors decide the worst is over and move back into other investments.

The events of 1990-91, when the world last faced military action against Iraq, provide an object lesson in how quickly gold prices can move.

When Iraq invaded Kuwait in August 1990 gold took off, rising from US$370oz at the start of the month to US$413oz by August 21. But the surge was short-lived.

By October it was back to pre-invasion levels and, although it rallied again, by the time a ceasefire was declared at the end of February the price was lower than it was before the invasion.

If history repeats itself, a quick war in Iraq, or no war, would be bad news for gold speculators.

Even without a sudden outbreak of peace, the link between war and the gold price doesn't appear as straightforward as some enthusiasts argue. Since February, with war apparently closer by the day, the price has generally been falling, not rising.

Longer-term history is no more encouraging. The gold price peaked at US$850oz in 1980 and has never come close since.

Over the past two decades gold has made a few spurts, for example, around the time of the 1987 sharemarket crash, but the general trend has been a steady decline -a feat that even international sharemarkets haven't emulated.


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