So Goldcorp’s chief executive, Kevin McArthur, was right. The gold price has hit the $1,000 record. But then the Fed’s interest rate cut was smaller than anticipated, sparking a sale by the big funds. And the price dropped! And he expects it to stay high, too. For a long time!
But mining chiefs are pretty convinced that the gold price is going to remain high. And for a long time! Mr McArthur has made some pretty dramatic statements. “We're going to run out of gold." And, this is “nowhere near a bubble”.
If he is right then he has probably got this Canadian producer’s strategy right, to. That is to add to reserves and boost production by 50% over the next five years. Cutting costs at the same time, of course.
At its all time high this year, so far in 2008 gold price has climbed nearly 20%. Fear, funk or greed? Whatever — funds, speculators and private investors have all piled into the famous “safe haven” in these jittery times!
At another Canadian producer, Yamana Gold, the chief executive makes an even higher stab at the price. Peter Marrone reckons the current environment is a "perfect storm" for a rising gold! By that he means the chance, simultaneous occurrence of events....the sub—prime crisis, a plummeting greenback, interest rate cuts, power cuts, rising demand, sliding production... and so on.
And with speculation, he says, that gold could replace platinum in catalytic converters for cars, then gold demand will really be on its way up. Thus, so is the gold price. He reckons that gold will breach $1500. In 2008! And if you think that these are two lone voices, think again.
When Barrick talks we listen
Take another mining top dog. Greg Wilkins is chief executive of Barrick, the world’s biggest gold producer. Now in mining circles, when the chief of a company like Barrick talks, people listen.
He came out saying that the "fundamentals are in place for a good sustained rally in the gold price". And to prove his point he said Barrick is committed to remaining an unhedged producer.
Due to volatility in commodities prices, sometimes gold producers "hedge" their bets by locking in a minimum price for the metal. The objective being to guarantee sales and profits — it is called prudent risk management. It is a strategy used in times of uncertainty. But in today’s environment, when miners clearly believe in a rising gold price, that strategy is considered dated.
In fact, gold companies have been systematically de—hedging. Last year Newmont was another one to scrap its hedge book. Any miner worth its metal now thinks that "hedging" is a dirty word.
Predictions are never easy
But it is not just miners that think its early days for the gold rally. Wang Lixin, managing director of World Gold Council China told a local Chinese rag that "$1,000 is just the starting line for a rally in the gold price."
But they could all be wrong, says Erin. Always one to bring us back to reality! Okay, okay, so predicting the gold price is notoriously difficult.
But if you are going to take predictions about the gold price seriously, it seems that the miners have a better head for accuracy than bankers. And certainly, for that matter, a better head than analysts.
Back in 2005, Newmont Mining’s Pierre Lassonde said the price of the yellow metal would rise to more than $1,000 an ounce in the next five to seven years. That happened a little sooner than anticipated.
Then late last year, Adam Fleming, the chairman of South Africa’s Wits Gold, said he believed the gold price would hit "four digit highs". And sooner rather than later! He was right, too.
In October, Ian Cockerill, another South African, said the gold price would go to $1200 within two years. He took a bet with Paul Walker — an analyst from top—notch metals consultancy GFMS. Mr Walker apparently said the metal would not hit four digits. Well he was wrong. "Those South African’s are not as daft as they look", says Erin (of course).
At around about the same time, Swiss bankers forecast a cautious $700 for 2009. Wrong! Morgan Stanley reckoned $800 and Goldman Sachs was prepared to go for $850 per glittering ounce. Wrong again!
And the moral of this story is... never trust a banker.
So... To invest or not to invest?
It is all very well gloating about the rising price of gold but consider this. The World Gold Council reckons that when adjusted for inflation, bullion must hit $2,200 to equal the records of 1980!
So, do we believe in this golden horizon for the yellow metal? Put it this way, we trust miners more than bankers. And the fundamentals look pretty sound...falling dollar, interest rate cuts, electricity outages, demand outstripping supply...we’ve mentioned them often enough!
With all this in mind, do we want a stash of gold bars under our bed? In our cosy London terraces storage is a bit of a problem, so probably not. What about collectible coins? No thanks. Too risky. A gold sovereign, perhaps a Krugerrand? Well, maybe. This is a relatively cheap way to own the real thing. And I am, after all, South African.
This time though I think Erin is right. A mutual fund is the way to go. They might levy charges but at least I won’t have to worry about my South African security paranoia taking hold.
Then again, we might just head down Old Bond Street for a spot of jewellery therapy. Much more fun!
Happy mining,
Erin and Isabel
