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Gulf War debunks theory of flight to gold during crises

By Peter V O'Brien

Friday 5th October 2001

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People with a hankering for the precious metal section of commodity markets had a dull year in gold and silver and tough time in platinum.

Much was made of the rise in the London gold price after the attacks in the US, with a rise of 6.9% from August 31 to September 21, but Table III shows the gain from December 1999 was only 0.6% and 7.1% from the end of 2000.

The usual arguments were trotted out about a flight to gold in times of international crises.

They were valid to the extent that the gold price increased after September, meaning people bought the metal, but there was a decline on Monday of the last week in September.

That meant there was a drop in demand, or profit-taking, both of which were hardly signs of panic.

The situation could change if there is an escalation of military activity but history, for what it is worth, has shown otherwise.

Movements in the gold price, before and during the Gulf War of 1990, are good example. The price went from $US372.30 on July 31, 1990, to $US410.60 on August 17 but fell to $388.70 at the end of September, compared with the 1990 high of $US423.75 on February 7, months before there was any hint of a conflict.

It was also noted that stability in the gold price came, in part, from the activity of producers who usually have forward hedging structures in place, compared to an earlier system of physical delivery of metal.

Hedging procedures can have a dampening effect on price movements, as can the selling activities of central banks if they consider substantial price rises are likely to fuel inflation.

The London gold price is only a guide for private investors in gold. They deal in bullion (bars or wafers), gold coins or jewellery.

Prices for each type differ from the London daily "fix." New Zealand individual investors in gold should remember that bullion (99.9% gold) and Canadian maple leaf coins (also 99.9% gold) are considered "pure" gold (exempt from GST), but South African krugerrands and UK sovereigns have a 91.666% gold content and are classified as "fine" gold. They attract GST.

Gold has a basic emotional and psychological appeal to many individuals but has been demonetised for years and more than 80% of production is used for jewellery.

People who buy gold jewellery as an investment can be taking big risks, because there are two values in the price: an intrinsic value related to the gold content and an aesthetic value based on the object, craftmanship and beauty.

Anyone who buys silver as an investment, apart from antique or modern objects and/or some coins, probably gets a kick from watching the tides ebb and flow, another activity which is predictable and boring.

The figures for silver price movements in Table III confirm again that silver lost its link with gold a long time ago, although there were periods in the past year when the two moved together.

It has been said on many occasions that anyone wanting to make a killing in silver needs two things: a big rise in the price and large storage facilities.

A metric tonne of silver at prices in late September would cost about $US1.85 million (assuming my translation of troy ounces to imperial ounces and then to metrics is correct) and a tonne of silver would occupy considerable space, far more than $US1.85 million worth of gold.

The inclusion of platinum in Table III just rounds out the precious metal section of the survey. No individual, and probably no fund/speculator, would attempt to use platinum as a hoarded investment. Annual production and world stocks of platinum are measured in millions of troy ounces while gold production and reserves are measured in tonnes. All the platinum ever mined would fit into a small room.

The International Platinum Guild said last year demand for platinum was likely to be flat, as its use in jewellery levelled off, but the warning, which proved correct, was apparently ignored until reality took over and resulted in the price decline shown in Table III.

While people with strong speculative nerves could be prepared to take positions in commodities, or securities associated with them, it would seem no place for conservative investors in the current climate of uncertainty, potential drawnout wars against terrorism and likely recession.

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