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Gold’s status as a safe haven against bad times and hedge against inflation may be more perception than reality, claims a senior Australian bank economist. He argues that other metals may hold greater promise in the long run when commodity prices lift again. Major gold miners, however, are generally remaining upbeat about the yellow metal’s future with some even expanding operations amid the present global economic slump…

In fact, in real terms and looking at the past 100 years, gold may have lost the battle against inflation. It has not returned to the inflationary levels of the 1980s, which is around the equivalent of US$1600 an ounce in terms of present values. Justin Smirk, senior bank economist with Westpac Economic Research, recently told the annual Paydirt’s gold conference in Perth, Australia, that the price of gold is nearing its peak and it may soon lose its lustre as the preferred investor hedge against inflation.

"It will continue to do well, but it will be outperformed by other rebounding commodities which will move faster as economies recover," he said.

He added that the metal would need an outbreak of inflation to have a strongly positive future, but if inflation did accelerate other commodities would probably outperform gold.

Doubting the perception of gold's value

"On that basis, we question the perception of [gold’s] true value." Smirk said Westpac’s forecasting suggested a gold price of around $914/oz in 2010, rising to $1063/oz in 2011 and $1150/oz in 2012. However, the bank’s own parallel forecasts for copper suggested the copper price performance would outperform gold over that period on a percentage basis. Smirk acknowledged, however, that the current rush to gold was hardly surprising as cashed-up China and European economies which would have invested a large share of their funds in the United States had turned away because of the American economic downturn, and gold has been a short-term benefactor.

Not everyone seems to share Smirk’s pessimism about gold. His comments came on the same day that the head of exploration at global miner Gold Fields, Tommy McKeith, told the conference his company would restore production to four-million ounces of gold annually and the St Ives gold mine in Western Australia was now producing significantly higher grades. He said the price of gold had trended up since July 2005 and remained around US$900 an ounce. "For a gold miner, that near four-year upwards price trend combined with the current strong price delivers strong upside potential," McKeith said in a statement.

He said Gold Fields, Africa’s second largest gold producer, would not use its improved cash flow to buy other mining companies; instead the money would be invested more heavily in exploration.

Taking a different strategic approach, it was reported that global gold-mining giant Newmont is cashed up to pursue acquisitions and the US$2.9-billion Boddington gold project in Western Australia is on track to start production towards the middle of this year.

"Gold is pretty sexy again"

Newmont Asia Pacific assistant regional vice-president Philip Stephenson was reported as saying that despite tight credit markets, the company last year raised US$1.7-billion to fund acquisitions. He said Newmont expected the gold price to remain buoyant this year with a price above US$900 per ounce. "Gold is pretty sexy again — it’s a great time for us in the gold sector. The fundamentals for the gold industry are sound. The gold price has weathered the storm pretty well compared to base metals, but silver has hung in there pretty well too," he said.

From the same region, Sino Gold Mining said at the Paydirt’s conference that China is the place to be for gold miners, with cheap and abundant debt financing on offer for the right projects. Sino Gold Mining’s president and chief executive Jake Klein told the conference that Sino Gold, which was the first foreign entrant in China’s gold sector in 1995, was benefitting from the Asian superpower’s ready access to capital. "Chinese gold companies and the Chinese gold industry are undergoing a revolutionary rate of change and what is going to be a major catalyst for change is access to capital," said Klein. "Sino Gold — not even a local, domestic company — has benefitted from that access to capital." Klein said China, currently the largest gold-producing country in the world, was highly prospective for the precious metal, but under-explored. About 10 000 gold deposits had been identified within its borders so far.

Published courtesy of Blue Chip magazine

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