05/02/2013 - 10:40

Analysis: the fading golden glow

05/02/2013 - 10:40


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There will be some glum faces among the many Australian goldminers in Cape Town this week for the world’s second biggest mining conference, the annual Mining Indaba, because their favourite metal seems to be the only one falling in an otherwise buoyant commodities market.

True believers in gold, the so-called “gold bugs”, will dismiss the lacklustre performance of gold since late last year as a temporary aberration, a blip on a never-ending upward pathway.

Unfortunately for anyone who believes that they have four forces working against them:

  • Nothing rises forever.
  • The investment world is in the grip of “the great rotation”
  • Swiss banks are making it harder to keep gold in their vaults, and
  • One of the top Swiss banks, Credit Suisse, has turned negative on gold.

For someone such as me, who has been advocating gold as an essential component in all investment portfolios, now is a testing time because it would be unwise to ignore the growing weight of evidence against gold rising any higher.

The metal retains a role as a form of insurance against governments “inflating away” their sky-high debts, though if growth really is accelerating in the emerging world, and returning to the developed world, then it could be time to trim gold holdings back to no more than about 5% of a balanced portfolio, whether as bullion, exchange-traded funds, or low-cost goldmining stocks is irrelevant.

But, while holding gold as a form of insurance against excess government debt and surplus paper money in circulation makes sense as an investment strategy it is cold comfort to the more than 500 companies listed on the Australian Securities Exchange with some interest in gold, especially those with management at Mining Indaba.

The idea of travelling to Cape Town for most gold-company directors is that it’s a chance to market their business case, mix with London and New York fund managers who are drawn south for a bit of sun after a freezing start to their year, perhaps strike a deal, or two, and definitely enjoy the pleasures of one of the world’s great cities.

The problem with that plan is that selling a gold story when it seems to be the metal fading from view is a hard ask, as a few numbers demonstrate.

Since the start of 2013 virtually every metal traded as risen in price, except gold. Copper is up 2.5%. Lead is up 3.7%. Zinc is up 5.4%. Nickel is up 6.6%. Platinum is up 7.2% -- and gold is down 0.7%.

The fall in the gold price is small, but relative to its metallic relations it is the trend which counts, and that’s what seems to be influencing investors who are subscribing to the “great rotation” theory which says risk is declining around the financial world and now is the time to move out of safe places, such as government bonds and gold, and back into equities and commodities which offer a higher yield.

Swiss bankers, the legendary “gnomes of Zurich” sitting atop their vaults stuffed to the ceiling with gold should, in theory, be the last people to lose faith in gold, though that’s just what seems to be happening.

The first whiff of the Swiss going off gold came in a report last week that the bankers of Zurich are demanding higher fees to store gold on behalf of clients who have what’s called an unallocated account – gold held on the bank’s balance sheet with the ultimate owner being issued a piece of paper.

That system swells a bank’s balance sheet because of an obligation to buy and hold it whereas in future the banks want gold investors to buy their own gold and then pay storage fee which lessen the bank’s direct exposure to gold.

Worse than the new gold ownership rules was a more recent report from Credit Suisse which concluded that gold “appears significantly overvalued”.

The bank expects gold to continue its “sideways drift” before starting a long-term downward trend thanks to the world having successfully passed through the “acute phase” of the global financial crisis.

For Australia’s goldminers that could signal that start, not of a great rotation, but a great cull of high-cost gold producers, explorers with limited cash reserves, and project developers hoping to raise the capital for a new mine.



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