30/09/2010 - 00:00

Price and production key to gold

30/09/2010 - 00:00


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Few of the recent successes in the gold sector would be possible without a buoyant gold price to support them.

Price and production key to gold

Few of the recent successes in the gold sector would be possible without a buoyant gold price to support them.

But buoyant may be too soft a word to describe gold’s rise. The increase from $US250 an ounce in 2001 to nearly $US1,300/oz last week has been astonishing.

The battered economies of America and parts of Europe have fuelled demand for gold as a store of wealth in recent years, while the taste for jewellery among India and China’s emerging middle classes has also boosted prices.

Patersons Securities research and strategy coordinator Andrew Quin described it as a “10-year bull run”.

“Gold over the last decade has benefited as governments around the world lifted debt positions, placing currency values at risk,” he said.

“The financial system structure started to show cracks under rising over-the-counter derivative risks, and exchange-traded funds development provided easier trading access.”

On the Australian Securities Exchange, the S&P/ASX All Ordinaries Gold index moved in a similar trajectory to the broader All Ordinaries index from 2006 to 2009.

However, the gold index has since broken ahead, rising 52 per cent from a low of 5058.9 on February 5 to a high of 7711.7 on September 21. Over the same period, the All Ords index has decreased by about 5 per cent.

The Gold index tracks the performance of 34 gold producers and explorers and gives a good indication of investor sentiment towards the Australian gold mining industry.

These companies include big hitters, such as Newcrest Mining; with a market capitalisation of more than $30 billion, and smaller explorers such as Red 5; capped at $161 million.

“ASX gold stocks look to have run a little ahead of the gold price, however the market is commonly sentiment based and long term up trends can sometimes result in a rapid break higher,” Mr Quin said.

But he said it was unlikely these stocks would suffer from a mass sell-off anytime soon.

“At this stage most gold traders are going to stay with the gold trade,” Mr Quin said.

So while there are a number of factors pushing the gold price up, few analysts are brave enough to say how high it will go.

Jamie Sokalsky, chief financial officer of Barrick, offered his opinon this week, predicting a rise to more than $US1,500/oz in 2011.

His comments carry a lot of weight for international financial markets, considering Barrick has the largest production profile in the world and severa newl large mines coming onstream by 2013.

Reuters reported Mr Sokalksy as saying: “From what we’re hearing, there are still significant new buyers coming into the market.

“My view is that we could see much stronger prices still from here. I can see gold easily taking out new highs and going above $1,500 an ounce in the next year.”

Perhaps more importantly, there is a widely held view that gold has found a new price floor at $US1,000/oz, which it is unlikely to fall below.

But some of these gains are being lost due to the higher Aussie dollar.

Domestically based companies are having profit margins cut, due to the fact that gold is traded in US dollars and they are getting less Aussie dollars as a result of the higher exchange rate.

But the question of whether the gold price is sustainable while there is so much uncertainty surrounding the global economy has got many advisors taking a cautious view of the industry.

Fidelity Investment portfolio manager Kate Howitt warned we could be in the middle of a gold bubble, which would inevitably burst.

“The outlook for gold is still quite rosy, as the major economies of the world continue to issues large amounts of debt, investors in those assets, most importantly central banks, will continue to look for a ‘non-dilutable’ hedge,” she said.

“The counterbalance to this attractiveness is that gold is one of the few assets where its value can only be imputed. Gold will never generate cash flows, so for purist investors it has no value.

“From this point of view, gold itself is in a bubble driven by investor fear, implying that the price of gold will collapse when investors realise the world is not ending.”


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