A friend of GATA applies to be a friend of the court

By Luke Johnson
London Sunday Telegraph
October 21, 2001

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These are certainly interesting times in investment markets
and all sorts of bizarre assets are suddenly being taken
seriously by the clever money managers.

The classic quot;barbarous relicquot; is gold, perhaps the original
store of wealth. While it returned an annual average of
almost 20 percent from 1968 to 1979 -- ahead of virtually
every other form of real or paper asset -- it has savagely
underperformed shares and property since then. But every dog
has its day....

Gold has always been seen as a safe haven in dangerous
circumstances. Many Americans believe the Four Horsemen
of The Apocalypse are about to ride into Manhattan, and are
feeling scared and financially battered. They are retreating to
hard commodities such as gold that they see as offering
security.

They have suffered a $4,000bn reduction in the value of their
portfolios; many are experiencing a bear market for the first
time. They are frightened that there will be a full depression.
The present psychology of buying gold is about preservation
of capital, hedging and playing the contrary game.

One of its great disadvantages is that it generates no income.
But in the current low interest rate climate, the yield on cash,
bonds and the like is almost negative once inflation is taken
into account. So by buying gold now you are missing very
little on the dividend front.

It is all about the capital gain -- or loss. At least gold is highly
liquid, with minimal commission charges, unlike most other
alternative asset classes like property and venture capital.

Moreover, experts purport that gold is negatively correlated
with other assets -- it rises when they fall, and visa versa. If
you buy this argument, then the current decline in stock
prices is a major gold-buying signal.

There are various ways to play the gold market. One can
simply buy hallmarked gold bars at about $280 an ounce,
or bullion coins such as Krugerrands at a small premium,
or gold futures or options.

It is important to check the custodial arrangements for
the physical metal and the credibility of the financial
institution that helps you; instead of them storing it you
can always take delivery -- but you had better get
insurance! You can even invest in numismatic coins,
but these sell for a substantial premium to the value
of their gold content.

Alternatively you can invest in gold mining shares.
Gold mining equities offer greater leverage than holding
the metal directly, but also added forms of risk. These
types of shares can be highly volatile and difficult to value
on fundamentals.

They are mostly quoted on the Australian, South African,
Canadian and American stock exchanges. Do take care
and remember that dubious promoters, speculators and
charlatans often manipulate small mining stocks.

The world's quoted gold mining shares have a total market
capitalisation of $30bn-plus, so there is plenty to choose
from. If you want a conservative investment, pick a solid
multinational like Anglo American, Barrick Gold or Newmont
Mining.

The price of gold is determined by a host of factors -- mostly
macroeconomic. Central banks hold about a quarter of the
world's gold and carry out selling and lending activities --
often fairly secretly.

Annual world production is about 2,350 tonnes, while
consumption varies, but is about 75 per cent for jewelry, and
the rest for the electronics industry and dentistry. Consumption
easily outstrips supply. Yet simple supply and demand from
users and producers is only one element of the metal's overall
price dynamics.

In the early 1980s, the era of high inflation, gold peaked at
$850 an ounce -- in the past 20 years it has fallen to a third of
that level, partly thanks to improvements in technology cutting
the cost of new production. This woeful investment performance
encourages the diehard gold bugs to believe that gold is
incredibly cheap and due for revaluation.

They feel the panic over war and recession will increase
investment demand. The gold bulls say gold rises when the
dollar falls -- and many commentators believe the dollar to be
overvalued.

They like the shelter and stability gold offers, and its retained
purchasing value. They cite the example of how an ounce of
gold would buy a suit today -- just as it did in Henry VII's day.

The extremists insist gold is going to $1,700 an ounce. I remain
to be convinced. You can get more details of their wild hopes
on www.amergold.com and www.gold-eagle.com. The more
sober case for gold is made on www.gold.org.

But then the gold bulls are all the subject of Virgil's comment
on the subject: quot;What do you not drive human hearts into,
cursed craving for gold!quot;

* * *

Luke Johnson is chairman of Belgo Group.

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