The gold price nudged through the $400 level this week, its
highest for eight years, giving the World Gold Council the perfect
background to unveil a new fund aimed at encouraging small investors to buy the precious metal. From next Tuesday, ordinary
investors can, for the first time, buy and sell shares that each represent one tenth of an ounce of gold and mirror the world gold price. The share issue, called Gold Bullion Securities, will
trade just like any other share which can be bought through a stockbroker, and investors can buy as few or as many shares as they wish. The gold itself will be stored in the vaults of HSBC in a location (near Canary Wharf ) so secret that even the scheme’s promoters don’t know precisely where it is. But will it make for a good investment? The yellow stuff has surged in price by 60%
since its 2001 low of just over $250, so investors going in
today have already missed out on much of the gains. Perhaps
it could climb back to its 1979 peak of nearly $700, although
nobody in the market expects it to. That short-lived spike in the price was caused by a panic among the Swiss when they dumped US dollars and switched into gold. Indeed, much of the recent
rise in the price of gold reflects the decline in the US dollar. In this market the golden rule, so to speak, is that a falling dollar pushes the gold price up. Translated into sterling, the gains look
far less attractive. The world’s central banks have been selling their gold stocks for years (led by the Bank of England, although
Canada and Australia have sold off almost their entire
reserves) which has presented a permanent downward pressure
on the gold price. But there are plenty of arguments in favour of a continued rise in the gold price. Ian Henderson, who manages
gold shares at JP Morgan Fleming, says underlying supply of gold (much of it from South Africa) has fallen to 2,600 tonnes a year because of the depressed prices of recent years, and there are
no new eoven-ready’ projects ready to push supply up. Meanwhile demand for gold (almost entirely for jewellery) is on the way up –
from 2,700 tonnes in 2002 to 3,000 tonnes this year and an
expected 3,200 tonnes next. Demand is robust in the
world’s traditional biggest market o which is India o while Chinese demand is also rising fast. The 1999 eWashington Accord’
limited central bank sales of gold, and in any case, most of the reserves have now been sold off. Meanwhile, a number of technical factors involving hedge funds now point to a firmer gold price. The fall in US interest rates has killed off a practice known in the
gold market as a econtango’ trade, where hedge funds forward
sold gold they leased off central banks. The big gold producers o
led by Newmont Mining o have also stopped forward selling, so helping prices recover.
Links:
www.goldbullion.com
