Gold - trend is up

Price of gold quietly trending upwards
Source: South China Morning Post
Publication date: 2002-05-12


Slowly and with little fanfare, gold prices have been inching higher for more than a year now. Typically when an asset class or segment of the stock market begins to thaw as gold has, the sector will be prominently featured in investing magazines and highlighted on the financial programmes on television.
But managers of gold-oriented mutual funds and other industry experts say they are disappointed by the lack of attention being given to the yellow metal.

"Gold mutual funds are outperforming every other market sector," said Dick Stevenson, director of sales for Monterey Funds, which manages a gold-oriented mutual fund.

The lack of attention is partly the result of a 20-year bear market in gold, which has sapped investor enthusiasm, but also "few people really understand what moves gold prices", said James Stack, editor of InvesTech Research, a stock market newsletter.

"If we had soaring inflation, you would be seeing a lot more attention being paid to gold, because that's what people think moves gold prices," Mr Stack said.

"But without that, most people just believe the move is a temporary blip."

While that may be true, several factors are aligned that could propel gold prices even higher in the coming months. Gold prices have soared from US$254 an ounce in early 2001 to over US$300, a difference that flows directly to the bottom line of gold-mining companies.

On average, gold-oriented mutual funds took flight in the first quarter with a gain of 35.2 per cent, according to Lipper, a mutual fund tracking service.

Over the past 12 months, the sector is up 70 per cent, far and away the best-performing category tracked by Lipper.

By comparison, the average large-cap growth fund, one of the largest and most popular mutual fund categories, declined 6 per cent during this same period.

So what's up with gold?

The underpinnings of this bullish turn were in the simple economic fact that demand for gold was outstripping the supply, said Greg Orrell, manager of the Monterey OCM Gold fund.

Demand for gold, primarily for jewellery, electronics and as an investment, was about 4,000 tonnes a year, industry experts said.

Gold mines, most of which are in the United States, Canada and South Africa, produce about 2,500 tonnes.

That left a huge gap that had been filled by central banks selling gold and by the recycling of scrap metal, Mr Orrell said.

But in the past few months, most of the large central banks, such as the Central Bank of Britain, have indicated that they are finished selling their gold reserves, at least for the time being.

"I don't know of a single big bank that is selling," said Clay Hoes, senior equity analyst at American Express and an expert on the precious metals market.

As gold prices have climbed, the most obvious assumption is that gold exploration will increase, the supply will increase, the demand will be met and prices will stabilise.

That seems to make economic sense, but the reality is that it takes three to five years to bring a gold mine into production, according to Mr Hoes.

So the imbalance could persist for years.

Not only that, current production levels of existing mines were declining, experts said.

The demand for gold, which had remained basically stable for several years, got an unexpected boost from an unlikely source - the Japanese Government. On April 1, the Government reduced its guarantee on time deposits in Japanese banks. This encouraged small investors to turn their cash into gold. Japan imported 20 tonnes of gold in February, or six times the amount from the same period last year, he said.

Publication date: 2002-05-12