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Is gold mine?

By Vincent Heeringa

Tuesday 1st June 2004

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Should gold be part of your portfolio? Tricky question. And one not helped by the strong opinions held by almost everyone, "from rational analysts to the 'ammo-and-dried-food-hoarding' inbreds of Idaho," reckons Norman Stacey, a financial advisor with Diversified Investment Strategies and one of New Zealand's few gold experts.

Sticking to the facts doesn't help much either. The gold price recently reached a 15-year high of $427/oz. On the theory that what goes up must come down, gold was picked by one analyst on BBC World to reach an historic low of $60/oz. In early April it fell $28 in less than a week.

Doubts about gold have been gnawing investors ever since governments started to sell their bullion. The latest to toy with flogging its gold is France, which holds the largest reserves of all EU countries. The United Arab Emirates has sold every last ounce. Confidence took a further beating in mid-April with the shock announcement that long-standing gold trader N M Rothschild is to quit trading and surrender its seat at the London-based gold fix (a five-person committee established by Rothschild in 1919 that sets the daily gold price). Chairman Baron David de Rothschild said the bank had lost confidence not just in gold but in commodity trading altogether.

Is this the end of gold as we know it? Not according to Stacey and friends. In its annual gold survey, released last month, market researcher GFMS predicts a continuation of the bull market, with $450/oz a "good possibility". How so? "A major imbalance in base metal supply has arisen because most conventional forecasts were biased towards G7 economies. Asian countries were presumed to be satisfied with scrap. Then along came the burgeoning middle classes in 'Chindia', doubling the rate of consumption. So demand is outstripping supply," says Stacey.

It's not just metals. Fortune magazine recently declared commodities hot, with copper and aluminum reaching eight-year peaks and platinum at a 24-year high. Indeed, the "rational analysts", as Stacey calls them, were picking copper to reach $1/lb. By mid-April it was $1.30/lb. Throw in spikes in soybeans, oil, wheat and hogs (pork bellies are back!) and you find that by mid-April the Reuters-CRB index of 17 commodity futures reached its highest level since 1981. And while it's true that China is expecting a slow down in economic growth, and respected commodity trader Jim Rogers says commodities will come off their current peaks in 2005, there's still good left in goods. "Essentially we're in year five or six of a bull market that has another 10 or 15 years to go," Rogers told Fortune.

Stacey says gold will enjoy a similar ride for the same reasons. But he also points to an additional driver - the falling US dollar. In keeping with the GFMS survey, Stacey believes that the US's patchy economic recovery, terrorism threats, the war in Iraq and a loss of confidence in the greenback is driving demand for more reliable savings - like gold. Especially by savings-hungry Asians, who previously relied on the US dollar.

Makes sense, but such a view depends on doubting the strength of the US recovery. And on N M Rothschild being wrong. How brave are you feeling?

How to invest in gold
A rule of thumb in investing circles is to have somewhere between 5% and 10% of your portfolio in commodities. Why? Despite their reputation for volatility, commodities can offset downturns in other markets. Market research firm Ibotson Associates discovered a model portfolio from 1979 to 2003 with 55% in stocks, 30% bonds, 10% cash and 5% in commodities outperformed the same portfolio minus the commodities.

If gold is your choice of commodity how do you get it?

Bullion - You can purchase it outright from an outfit like New Zealand Mint, which produces the 99.9% pure Gold Kiwi coin. Buying, say, $10,000 worth gets you a 14oz coin to slip in your pocket. But you'll pay between 5% and 7% above the fix price for the privilege. Of course, storing gold has its costs in insurance and security, a component punters often overlook in the enthusiasm to have the real thing.

Equities - Often delivering a premium above the gold price are mining stocks. They also help spread your risk across other metals. In New Zealand the largest listed company is Oceana Gold. A stock getting Norman Stacey's thumbs up is Newmont, the world's largest gold miner, which is listed on the Australian Stock Exchange. To get into equities try brokers Forsyth Barr and McDouall Stewart, who both employ gold experts.

Funds - The safest way to get gold into your life is through a resource fund such as the Merrill Lynch World Mining Fund, a UK Investment Trust previously named Mercury. Contact FundSource to track down relevant funds.

Research - Before doing anything else, do some research. There's a heap of sites on gold and commodities (try www.mineweb.com), and anything that's said by Newmont president Pierre Lassonde is worth listening to (just Google his name).

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