Gold regains its precious lustre

By Peter V O'Brien

Friday 4th October 2002

Gold buffs will be congratulating themselves and laughing at their critics after a 15.5% rise in the London price of the metal since the end of last year and an 18.4% increase from December 2000.

Gold did better than most major sharemarkets in the two periods, which gave more strength to the argument that it is a safe harbour when international storms have swept the political and economic seas.

There have been many storms since the end of 2000, of which September 11, 2001, was among the most significant. Other problems included weakening international economic conditions, erosion of confidence in corporate responsibility and reporting rectitude in the US and military action in Afghanistan and talk of it in Iraq. Other political hotspots added to unease about paper investments.

Rising gold prices had a spin-off to market values of goldmining shares, to the benefit of people who still preferred indirect investment in gold over the physical metal. The NBR commodities survey last year noted a gain of 6.9% in the London gold price between August 31 and September 21, a period that straddled the terrorist attacks on the US.

Table II shows the price closed 2001 at $US277.75 an ounce, or 4.8% below the $291.90 reached on September 21. It is also worth noting the $US322.95 shown as the price on September 23 this year was $US49.45 under the level of July 31, 1990, before the invasion of Kuwait.

Traders pushed the London price to $US410.60 but it came back to $US388.70 in late September 1990. The three prices quoted for 1990 were well below the year's high of $US423.75 on February 7. It seems likely more than a US-led invasion of Iraq would be needed to get the gold price to $US400.

Consideration of the historic gold price movement puts this year's run into perspective, although it is undeniable a 15.5% gain in nine months partly justified those who kept the gold faith. The latter include many sharebrokers who regularly recommend goldmining companies.

Anyone who thinks gold is at the start of a sustained price run should remember producers prefer stability to price volatility. They use well-established hedging structures to maintain stability, in contrast to the days when they relied solely on physical delivery of metal and hoped things turned out right.

Investors who are devoted to gold as a supposed hedge against inflation (not much use these days when developed economies have low inflation) or to preserve asset values in uncertain times can buy bullion (bars or "wafers," coins or jewellery.)

Most of the world's marketed gold (about 8%) goes into jewellery. The gold content of trinkets is low and its value equally low, although there may be pleasant aesthetic attributes.

The main points to remember about buying is that "pure gold" bullion and Canadian Maple Leaf coins are free of GST but UK sovereigns and South African Krugerrands are "fine gold" and liable for GST.

Price movements in silver and platinum this year were far less exciting than the gold run.

There is little interest in silver, apart from people who find silver jewellery attractive or are antique lovers.

Last year's survey noted the International Platinum Guild said demand for platinum was likely to be flat for some time as its use in jewellery levelled off. That is still the case, despite an 18.95% price increase this year in the wake of slightly increased demand.

Buying has increased among the Japanese, who have a passion for platinum jewellery along with groups of trendy westerners.

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