By Philip Rennie,
, October 2007
When gold gets a run on, as it has in recent months, it is usually because there is pain in the financial system. Far from being sympathetic, the gold-bug's catchcry is to go for blood get the highest price while you can.
Gold investors had a dreary time in the 1990s, with the price drifting along, often below $US300 an ounce. The $US was strong, which is not good for gold, and short selling gold became a popular hedge fund strategy. The tide finally turned in 2002 and has continued in gold's favour ever since.
Breaking out of the $US300 bind, the price briefly spiked as high as $US700 in 2006. It was recently above $US700 again and gold-bugs are talking about breaking the high of $US850 and going on to the holy grail of $US1000.
The oddball $US850 1980 high was caused by desperate buying from the Shah of Iran and his followers as he was being deposed. They used gold to transport their ill-gotten gains. Once they stopped buying, the price sank.
Nevertheless, $US850 is permanently etched on the charts, and technicians see the eventual breaking of this longstanding record as an important goal that should then clear the way for further gains, perhaps even a dash to that magic $US1000.
But even $US850 will require strong buying by investors and speculators who see a significant weakening of the US dollar or some other financial disruption as being likely to do the trick for the yellow metal. Jewellery is the big application for gold, but demand tends to be price sensitive and to ease until consumers get used to higher prices.
There are several reasons for the present strength. Though not an industrial metal, gold has benefited from the commodity boom. It has also been done a favour by $US weakness. Gold is priced in US dollars and tends to rise as the greenback goes down. So because the outlook for the US dollar is not strong, gold might get further mileage from currency markets.
Another factor in gold's strength is nervousness caused by the credit crunch. One reason is that the liquidity pumped into the global monetary system to offset the crunch could stimulate inflation; gold is traditionally seen as an inflation hedge. There are also fears that the credit crunch could take the US into recession, say in 2008, which should be good for gold in its role as the bad-news hedge.
There are a number of ways that people can invest in gold. They can buy gold bars, bullion coins or high-carat jewellery. Although Australians are not known as big gold hoarders, it is not uncommon for a share or property investor to have a small bar or two or a few sovereigns in their safe deposit boxes. Investors with doubts about the future of the US dollar or the stability of the international monetary system might have substantially more of what is historically a store of value when all else fails.
Of course, the problem is that these holdings generate no income. If you were sitting on gold through times like the 1990s, it was a dud investment. Instead there are ways to invest in gold via packages involving, for instance, futures and government bonds that produce a small return … but the reality remains that there will only be gains if the gold price rises.
Another way to invest in gold is through overseas-listed exchange-traded funds (ETFs) that cover either a basket of large international gold-producer shares or gold itself.
Most Australian investors get their gold exposure through the shares of local goldmining companies. The various gold discoveries in New South Wales, Queensland, Victoria and especially Western Australia were major chapters in Australia's commercial history. Of course, there were plenty of losers in the companies spawned on the various goldfields, but the winners made exponential gains.
The same is true today. If a company discovers a significant gold deposit, it should be a profitable investment. The best scenario is that as the mine is developed and further exploration takes place, the gold reserves increase substantially.
Unfortunately, the Australian gold sector has not performed well in the past few years. There has been a trend towards less than forecast production and higher costs. Some companies, especially those that raised a lot of capital to develop mines on old Victorian fields, have been disasters for shareholders.
Nevertheless, there are also good stocks and no reason to doubt that further highly profitable discoveries will be made.
For investors who believe in going with the biggest producer, Australia's premier goldminer is Newcrest Mining. Although it has had disappointing production at times in the past year or so, especially at its biggest mine, Telfer in WA, this is a world-scale operation, with production spread over several large mines. With Telfer now operating well, Newcrest looks like the local stock to hold if gold has indeed moved into a long-term bull market. Newcrest recently made a major refinancing move to close its hedge book and increase the exposure to gold price fluctuation, which is what investors would prefer at times like the present when gold prices are strong.
Lihir Gold also offers substantial production and long life, making it a suitable stock for long-term gold investment. It is also true that the mine at Lihir Island in Papua New Guinea has had its share of production problems, but operations appear to be going smoothly at present.
Equigold has been strong recently. It operates two gold mines, one in WA and the other in Queensland, and is developing a third in the African country Ivory Coast. This stock offers an attractive combination of good mine life and low costs.
St Barbara Mines has an ambitious growth program that aims to achieve a major lift in production. If it reaches its targets and the gold price stays strong, St Barbara should perform strongly. Its driving force is geologist Ed Eshuys, who has a sound track record in mine discovery.
Oceana Gold operates the Macraes and Reefton mines near Dunedin in New Zealand. It is also developing the Didipio copper-gold project in the Philippines that is expected to come into production around 2010. The copper-gold combination provides a balance of precious and industrial metals that lessens the pure gold exposure.
Oxiana, which has been an outstanding growth stock in recent years, produces copper and gold through existing mines in Laos and is developing the Prominent Hill copper-gold project in South Australia. It is also conducting a feasibility study on a big gold-silver deposit in Indonesia. Some precious metals analysts are more bullish on silver than gold.
Avoca Resources is a gold producer with operations near Kalgoorlie. It has strong reserves and good grades, with growth potential from further exploration.
There are a number of Australian companies producing or exploring for gold overseas, some with notable success. These include Sino Gold, which is now producing gold from its first mine in China and has other projects on the way.
For those keen to punt on emerging producers and explorers, two stocks with potentially promising acreage are Integra Mining and Focus Minerals.
For the complete story see Money Magazine's October 2007 issue. Subscribe now.
Keep reading - next article