MINCO gold and silver explorer.... the facts

The Sunday Times December 18, 2005

Could gold blaze back to its all-time high?

The precious metal has soared this year to $540 an ounce — and some experts tip a return to $850.

GOLD bulls predict that the price of the precious metal will return to its 25-year-old all-time high of $850 an ounce in the next few years, despite a heavy sell-off last week.

The gold price has gained nearly 16% so far this year and touched a high of $540 on Monday, before plunging to $508 by the end of the week because of heavy selling in Japan.

However, many analysts think the pullback will prove temporary and the gold price will rally further next year, possibly even regaining the nominal peak of $850 that it achieved in January 1980, when markets were in the grip of a global inflation scare. However, $850 then was worth about $2,500 in today’s terms.

Paul Walker of GFMS, a metals consultancy, said: “We think the rally can continue for some time. There are such big imbalances in the American economy that US assets are seen as too risky and investors are seeking alternatives such as gold. I can imagine circumstances over the next 12 to 18 months in which these imbalances prevail, the dollar falls dramatically and the subsequent flow of funds into gold takes it to the nominal peak seen in 1980.”

Greg Smith at Fat Prophets, an independent consultant, also thinks a weaker dollar could push gold above $850, but not until 2007. His forecast for next year is $680 to $700 — about a third above current levels.

He said: “We think last week’s pullback should be seen as a short-term aberration in a longer-term uptrend. We forecast that gold will hit $850 an ounce in 18 to 24 months. The final piece of the puzzle will be the weakening of the US dollar — cracks are starting to show.”

Figures out last week revealed that the American trade gap hit a record high of $68.9 billion (£39 billion) in October, which puts pressure on the dollar because the country imports so much more than it exports.

Pierre Lassonde at Newmont Mining, the world’s largest gold producer, has even said the gold price could hit $1,000 in five to seven years. That would make it as expensive as platinum. However, some analysts say the gold market has got ahead of itself.

Paul Merrick of RBC Capital Markets, an investment bank, said: “Gold rose $50 in the first 12 days of December, which is nearly unprecedented. It has happened before only in extreme conditions such as war. The sell-off last week was therefore a return to market sanity.”

The Japanese have been blamed for the spike. They piled into gold this month as an alternative to the weaker yen, only to be caught out when their currency strengthened against the dollar last week. This led to a rush for the exit and a subsequent drop in the price.

But most analysts do not think the pullback is the start of a more sinister downturn. They point to many factors that will prop up the price next year, particularly strong demand, tight supply and political tensions.

Demand for gold, primarily for jewellery, is about 12% higher than last year, while supply is flat or in decline, according to Merrick. He also points to strong investment demand from the Middle East and China. “The Middle East, which is awash with cash thanks to the high oil price, is proving to be an enthusiastic buyer of gold, with Dubai becoming a major centre following the recent establishment of a futures market,” he said.

“China is also becoming an eager buyer, as the country with the fourth-highest consumption in 2004. Regulations on the ownership of gold have been relaxed there over the past decade, and the potential for growth is enormous.”

Analysts also say that European central banks renewed an agreement to limit gold sales to 500 tonnes a year in 2004 — and there is scope for other banks to buy.

Asian central banks typically hold less than 5% of their foreign reserves in gold, compared with up to 70% in Europe, and they could become big buyers if they tire of the US dollar, currently their asset of choice. Argentina bought gold in 2004, while Russia and South Africa have indicated they wish to increase their holdings.

However, not all analysts buy the bulls’ argument. Yingxi Yu at Barclays Capital, an investment bank, said: “The gold price is being driven up by speculators, backed by myriad justifications such as the risk of inflation, the danger of an economic slowdown, the expectation of a US dollar correction, soaring physical demand, supply constraints, hopes of central-bank buying and so on.
“We think the truth is that speculators have been attracted to gold simply because it is going up. This increases the risk of a big correction should the positive sentiment turn.”

However, she thinks speculators — as well as a weaker dollar — could briefly drive the price as high as $600 next year.

Mark Hansen of the CPM Group, a New York based research firm, is almost a lone negative voice. He thinks the average gold price will peak at $505 in the first three months of the year, before falling as low as $446 in the summer.

Gold has hogged the headlines, but it is not the only precious metal that has performed well this year. Silver has surged by 23% to $8.39 an ounce, while platinum is up 11% at $954.

Analysts say that the outlook for other precious metals depends on gold. Walker at GFMS said: “The silver price is perhaps not justified by the fundamentals, but it has been riding on the coat-tails of gold and if investment interest continues it could stay above $8. As for platinum, supply relative to demand is fairly tight and, if gold remains high, platinum could stay around $900 if not $1,000.”

Despite the price uncertainty, advisers say that it is worth having gold in your portfolio — up to 10% of your total assets — because it tends to perform independently of other assets such as bonds and equities.

It is possible to buy gold bullion, but it can be difficult and expensive to store and insure in large quantities. An easier way to invest is through gold- bullion securities — shares that are traded on the London Stock Exchange and that rise roughly in line with the gold price.

A share is equivalent to a tenth of a troy ounce of gold. So if the gold price is $500, each share is worth about $50.

The metal is held by HSBC, so you don’t have to worry about storage and insurance. Set-up costs are 0.1% and the annual charge is 0.4%.

Alternatively, through a broker you could buy the iShares Comex Gold Trust, an exchange-traded fund listed on the American stock market. The fund buys bullion, so it will mirror the gold price. You do not pay an initial charge and the annual management fee is only 0.4%.

However, your stockbroker will levy dealing charges, which may be high for a US-listed fund.

Both schemes are valued in dollars. A sterling-based alternative is the Merrill Lynch Gold & General fund, a UK unit trust, which invests primarily in shares of gold-mining firms.

Ways to invest in precious metals

Gold bullion securities are shares traded on the London Stock Exchange that move roughly in line with the gold price. One share was worth about $50 on Friday. You can buy them through stockbrokers

The iShares Comex Gold Trust is an exchange-traded fund listed on the American stock market, available through most UK brokers. It buys bullion and aims to mirror the gold price.
The Merrill Lynch Gold & General fund, a UK unit trust, invests primarily in the shares of gold-mining firms.

You could buy shares in mining companies. For example, Lonmin, a London-lister miner, has large platinum interests.

Spread-betting companies take bets on the price of gold, silver and other precious metals. Profits are free from capital-gains tax, but you cannot set losses against tax. And you could lose more than your original stake.