Gold Aims to Recapture Its Lustre as a Safe Hedge in Troubled Times

Source: Knight Ridder/Tribune Business News
Publication date: 2002-04-03

Apr. 3--After years of playing the part of Cinderella to other more-favoured financial assets, gold is finally shaking off its dowdy image and taking a shot at gaining the prize for best-performing asset market of 2002.

Since 1997, $300 (UKpound 208) an ounce has been a ceiling for gold as a combination of central bank auctions and lending to hedge funds, forward sales by gold producers and the much-touted death of inflation conspired to keep the price well below its historic high of $870 hit in 1980.

To those gold bugs who have never given up hope that this once lauded store of value would again take its rightful place in the pantheon of credible financial instruments, the poor performance of the commodity has been nothing short of a conspiracy.

Indeed, according to many gold aficionados, particularly those at the Gold Anti-Trust Action Committee, the US Federal Reserve, the US Treasury and European central banks, in league with major US investment banks, have conspired to keep the price of gold low.

Gold broke through the $300 level to reach a two-year high of $307.80 on 8 February. But the move did not last long, and as the price drifted off German Bundesbank President Ernst Welteke conveniently speculated that Germany might at some stage start selling gold. The timing of his statement was seen by many as an attempt by the central banks to ensure the price of the commodity remained capped below $300. However, the price has since rebounded, trading back above the key $300 level last week.

The latest rebound has been driven by new-found interest from the hedge funds, many of whom are betting that persistent selling by large investment banks to keep the price down, and central bank comments to achieve the same end, will ultimately fail to cap the upward trend.

Indeed, the talk now is that this so-called cartel is about to get its come-uppance, with some gold optimists suggesting gold may hit $600 or even $1000 an ounce.

The Enron scandal has brought to the fore the issue of cartels and especially the role of so-called bullion banks that reportedly have very large short positions in gold via the derivatives market. These are now being squeezed as the price of the commodity rises. Indeed, there is wildfire speculation among some US gold watchers that if the price of gold moves even $20-$30 higher we are going to see these shorts getting hammered.

There are plenty of other reasons why gold and gold-related stocks are worth serious consideration. As well as Enron, the markets also have to contend with Argentina's debt default and the huge bankruptcy cases of US companies.

Another factor favouring gold is the quadrupling of purchases of bullion by Japanese consumers worried about the safety of their bank deposits. Also, investors in the Middle East have started to actively purchase the metal as tensions over Iraq, Israel and Palestine mount.

Finally the all-powerful US dollar, which has held up remarkably well in the face of a weaker US economy, evaporating corporate profits and heightened worries over the threat from terrorism, may be set for a downturn, which usually means higher gold prices.

Against this backdrop there is a genuine case for thinking that gold provides an attractive hedge against financial and political stress.

However, gold has to become more than just an icon of gold bugs, conspiracy theorists and short-term speculators. Instead it needs to broaden its appeal as an asset among mainstream investors anxious to protect themselves in an increasingly uncertain financial and political environment.

Richard Morrissey is publisher of CreditCurve.com

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UKpound preceding a numeral refers to the United Kingdom's pound sterling. (c) 2002, Evening Standard, London. Distributed by Knight Ridder/Tribune Business News.

Publication date: 2002-04-03