Goldbugs rejoice! The yellow metal hit a two-year high in European trading yesterday, touching Dollars 312/ounce before closing at Dollars 309.65, up 12 per cent since the start of the year. Over the same period, the FTSE Gold Mines index has risen a staggering 55 per cent. And this on top of substantial gains in 2001.
Gold's supporters claim it is recovering its old position as a mainstream asset. They attribute the latest rise to fears about the Middle East, the dollar, oil and inflation. However, this analysis is confused and self-contradictory. It is hard to imagine a recovery that is profitless and inflationary. Anyway, the gold market is too illiquid and inaccessible to be of much use to mainstream investors. There is a more mundane explanation. Since 2001, gold miners have reduced their hedging positions. This trend gained force with Newmont's recent acquisition of Normandy. The reduction of forward sales put upward pressure on prices, reinforced by speculative funds taking long positions of their own.
Can this continue? Not much longer. There is a natural cap, as rising prices tempt renewed hedging and central bank sales. Some argue that the spot price should follow mining shares still higher. But mining stocks are geared plays on gold; and much of their gain relates to weakness in the rand and Australian dollar, which makes mines in those countries more profitable whatever the gold price. With gold funds holding net long positions of 4m ounces, a retreat could be messy.
Copyright: The Financial Times Limited 1995-2002
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