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Still going for gold to win

Watching all those medals being handed out at the Olympics set Briefcase pondering whether gold mining shares might be about to line up for a sprint.

Gold is as unfashionable as grandfather’s overcoat. To suggest it might make a comeback, invites the sort of derision afforded to those who thought oil was a great buy at $11 a barrel a year ago.

The strength of the greenback has knocked gold into a cocked hat as the preferred safe haven and storehouse of value.

The world is now extremely long of US dollars.

In the first half of this year, foreigners bought US$229 billion of US securities of which $90 billion went into shares.

Last year the number was $332 billion worth of US securities and another $276 billion was spent snapping up factories, office blocks, and shopping malls.

To fund this, they sold the Euro, pounds, Asian currencies, the Australian dollar – and gold. Patently, this has been absolutely the right call. But nothing is for ever and the US has one big problem.

Its current account deficit is heading for US$400 billion, or over $1 billion a day, which is an unprecedented 4.5 per cent of GDP. The economy continues to suck in imports from around the globe at dirt cheap dollar prices, which is one of the biggest single factors holding down inflation.

But exporters are hamstrung by the super strong currency, and US multinationals are being squeezed by the pathetically weak Euro, as well as the high oil price.

A precipitate decline in the US dollar would almost certainly lead to a loud pop in the gold price. Now trading at $274 an ounce, gold briefly visited $312 in June.

The trigger for the rise was the news that Placer Dome, Canada’s second largest gold miner, has suspended all new gold hedging “in expectation of improving gold market sentiment and reduced producer hedging”.

That announcement cut no ice in Australia, where virtually all gold miners are hedged up to the eyebrows.

The gold price, expressed in crippled Aussie dollars, is at a four year high of $504.

With average production costs across the industry now down to $320, anyone who cannot make good money digging up gold is in the wrong business.

Most miners are as happy as Larry. Not so their shareholders, who have taken a cold bath.

Institutional investors are not convinced gold companies can deliver the promised profits.

Paradoxically perhaps, the industry would not welcome a spike in the international gold price, if a stronger domestic currency eroded their earnings.

Those who do not buy the falling greenback/rising gold scenario might still consider shares like Normandy, which amount to a bullion backed bond, yielding 6 per cent at the current $1 level. Much the same might be said of Sons of Gwalia.

Determined contrarians who do envisage a gold price well north of US$320 will find it tough to identify leveraged plays among thick Australian hedgerows.

Lihir, down from $1.80 in the past year to 60c has 13.4 million ounces of the yellow stuff, of which only 16 per cent shows up in the forward sales book.

The odds of kicking a goal here are better than in the wobbly technology sector.

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