as good as it gets for gold *****

As good as it gets for gold: Dryblower

Tuesday, January 03, 2006


IF gold bugs are to be believed, 2006 will be their year, with a steadily rising price for the yellow metal and sharply higher share prices for gold producers. Dryblower wishes them all the best, but thought it time to point out a few facts about how markets tend to behave and to suggest that right now might be as good as it gets.


This observation is based on a cursory glance at how gold has performed over the past five years and, believe it or not, the trend has been up since the start of 2001.

In some years, the rise has been miniscule, but every year in this century gold has crept a little higher and now commands a price some 88% higher than it did at the end of 2000.

The effect of the rise from $US272 an ounce to a recent price of $US513/oz can be interpreted in many ways. For producers, it is a welcome relief from the dreadful 1990s. For investors, it has restored gold as a genuine investment class but, for consumers, it has made them start to think twice about buying gold.

It's the reaction of consumers which lies at the heart of Dryblower's hypothesis that gold is more likely to take a breather this year than continue to rise.

True believers in gold, who long for the day when it will be re-accepted by the world as a form of official currency, will reject outright this argument that gold is just another commodity. They say that central banks will soon start re-purchasing gold to bolster their stockpiles of the stuff.

The problem with that argument is that even central banks can see that they have missed the boat, and that gold has well and truly recovered from the 1990s. Why buy now after the 20% increase in the price of gold over 2005 and take a chance that the five-year recovery phase will continue into year six.

Dryblower's view of the financial world is that no market, not even gold, defies gravity and the laws of supply and demand.

Last year's 20% price rise, the best performance by gold in 25 years, did two things to the real gold market (as opposed to the mythical "currency" market). It caused some potential buyers of gold to baulk at the price which is moving out of their reach, and it also caused a whole raft of mothballed mining plans to be dusted off, and for previously sub-economic gold deposits to be re-classified as financially viable.

In other words, five years of rising prices, capped off by the 20% hike in 2005, have restored gold to its legitimate position as an alternative form of investment, and achieved two other goals – slowed demand in the jewellery trade which represents 80% of the market for gold, and encouraged new mine production, and possibly a little bit of central bank selling.

These supply-and-demand views of Dryblower lead to an obvious question from readers which goes like this: "Well, Mr Smarty Pants, if you know so much, what is your tip for the gold price at the end of 2006?"

Faced with such a challenge, and after considering the five-year rising trend, plus a quick glance at the tea leaves in the bottom of his morning cuppa, and a request (denied) for Mrs Dryblower to sacrifice a sheep so its entrails can be examined, the answer is $US510/oz.

There will be times when it goes higher, and times when its lower, but the tip is $US510/oz simply because every market after a period of strong growth pauses for a breather to allow supply and demand to re-balance.

And, apart from that, if there are goldminers out there who can't make a handsome profit at $US510/oz they really ought to consider doing something else.