Gold run begins to worry analysts

The gold bubble is on the point of bursting. Well, that is the view of several analysts and commentators watching dollar-gold prices. It is hitting new record highs each day. Is it a correct call?

The reasons for gold's strong dollar price advance have been well rehearsed. Gold is seen as a "safe haven" investment, particularly if the current strategies of recession-countering, low interest rates and quantitative easing lead to inflation. Countries are starting to fall over each other to gain trade advantages by lowering exchange rates. And central banks are either shying away from gold sales or are adding to their gold holdings - and what does that imply if there is a major move from holding dollars in reserves?

As it is, the usual gold bugs are predicting Armageddon and calling prices several multiples of current levels so long as US budget and current account deficits are not addressed; gold coin dealers are egging on the innocent to buy with predictions of fabulous profits to come.

This week, as AngloGold Ashanti unwound the global mining industry's largest hedge book, the cry went up that this was a major vote of confidence in further gold price advances. Yes, well ... AngloGold's decision-makers may well be good mine managers, but none of them claims to be able to predict gold prices precisely. So what does it mean for the average South African?

Consider this: on June 9, when gold was fixed at $1233.5/oz in London, one debenture of Absa's NewGold ETF traded at R95.54 on the JSE. This past Wednesday afternoon, when gold in London was hitting a new high of $1346.5/oz, the NewGold ETF traded at R90.70. Ignoring trading costs, you might have made a 9.2% dollar profit over that period, but in rand terms you would have lost 5%. Each debenture is backed by a hundredth of an ounce of gold - though you can't convert them into bullion.

If you want bullion, you will have to settle for Krugerrands, which were quoted at R9900 on the JSE on Wednesday - a 7.5% premium to that day's London afternoon fix.

Less than a month ago, George Soros, the prince of hedge fund managers, warned of a bubble developing in gold. He may well have been talking his own book, and since then, the metal has gone from strength to strength - in dollars, that is. But now, Soros is being echoed by others looking at the reasons for the metal's price performance.

Turning the AngloGold Ashanti hedging argument on its head, market analysts say the closing of the hedge book removes a buyer from the market - hedged miners across the globe have been buying to enable them to sell into their hedge book obligations.

This past week's rise to a record dollar price high followed the Japanese central bank's decision to cut interest rates to zero, to weaken the yen and give the country's exports a competitive edge.

Interest rate cuts have failed to drag the export-driven Japanese economy out of a decade-long stagnation, so why should they work elsewhere? Or, as some analysts are now arguing, are we facing a double-dip recession because the existing difficulties are not financial but have more fundamental underpins - those of persistently weak consumer demand, job losses or fears of them and the need for some years of budget and balance sheet restructurings by companies, governments and private households?

According to strategists at Barclays Wealth and Commerzbank, rising gold prices have been self-feeding or self-sustaining. They have created their own momentum. And ETF buying has been partly responsible for the gold "bubble". The gold market, it is argued, is close to a tipping point, at which millions of individuals offload their gold investments because there is little prospect of further price rises and because interest rates (and, therefore, the cost of holding gold) inevitably rise.

Recently, Barclays Wealth apparently suggested to clients that SPDR shares be shorted as a precaution against a gold price fall. In contrast, in a recent paper, the World Gold Council's Ashish Bhatia and Natalie Dempster rejected the proposition that ETFs had given rise to a bubble. The council's George Milling-Stanley was recently quoted as saying ETFs had opened up the means of investing simply and easily in gold to a new "universe" of investors.

We now need to see if they remain as firm holders or whether - as so many individual Indians are doing with gold "scrap" - they start to sell gold to get the dollar bills that can be spent in the grocery store.