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Gold — I’m telling you, this idea is gold, Jerry
Posted By Barry Ritholtz On December 14, 2004 @ 5:06 am In Markets | Comments Disabled
This may have gotten overlooked last week — if you follow currency, sentiment, or precious metals, its an interview worth reading.
Let me once again mention that the Online WSJ is well worth $40 a year — and it also includes access to Barron’s.
Here’s an excerpt of the interview:
Gold prices have surged 50% since early 2002 to more than $450 an ounce, and some market watchers are brazenly slapping a $1,000 price target on the metal for the near future.
That crystal-ball forecast seems heady. But John Bridges, a senior gold analyst at J.P. Morgan Chase & Co. since 1995 and author of "The Golden Goose" newsletter, says gold has already hit that level — even passed it — when adjusted for inflation. But he still has "problems with gold as an investment."
And it’s not all about the flailing dollar. Other factors, some real (supply-and-demand) and some eccentric (Indian thoughts of the afterlife) are playing a role, says Joseph Foster, portfolio manager of the $290 million Van Eck International Investors Gold fund, the first of its kind in the U.S. that dates back to 1956. He calls gold "the ultimate form of currency."
Can gold keep shining? Is $1,000 an ounce a realistic target? And how does inflation factor in? Messrs. Bridges and Foster answer our questions.
* * *
The Wall Street Journal Online: Gold is up 14% since late 2003, but the Amex Gold Bug index (a basket of gold stocks) is down 11% from a year ago. Why hasn’t the price of gold filtered into the price of many gold-oriented stocks?
Mr. Bridges: We’re positive on gold as hedge against the weaker dollar. Even if the dollar does recover, the strain on the world’s economic system by these swings in currencies suggests having gold as insurance isn’t such a bad idea.
Gold producers are suffering quite significantly from higher energy prices. Diesel has become quite a big part of some mining operating costs — as much as 20%. Then you also have the strength of the resource currencies — the Australian and Canadian dollars and the South African rand. Even the Peruvian sol is appreciating against the dollar. A lot of these big diversified miners have operations in these countries, and that’s affecting their operations.
Mr. Foster: We went through a severe correction back in
April and May, for both gold and gold shares. They were down
substantially. If you look at the performance since then through the
end of November, the Philadelphia Gold and Silver index (XAU) is up
37%. Gold prices are up 20%. So you look over that longer time frame,
and the shares have done fairly well. They’ve significantly
Online Journal: Is it all about the dollar? Under what scenario could the price of gold reverse course?
Mr. Bridges: The biggest factor still appears to be the dollar. But
I think we are getting some new buyers of gold stocks on the basis of a
likely fall in supply. It’s becoming accepted that gold production is
going to drift lower. Annual orders for gold are about 3,500 tons a
year. The mines produce about 2,500 tons. The gap is made up with sales
from central banks, which agreed in 1999 to start limiting sales of
gold. Since then, gold has been trading in this higher range.
Mr. Foster: The market has been very strong, so it wouldn’t surprise
me to see some dollar strength and a pullback in gold. There’s been
talk of European or Japanese intervention in the currency markets. That
hasn’t happened yet, but given the extreme levels that currencies are
at, we can’t count that out. There could be a little change of
sentiment if the Federal Reserve raises interest rates further.
So I think in the near term, a correction is in order. Longer term,
with our trade deficit at record levels and growing, I think the dollar
still has further to fall, which will be good for gold.
Online Journal: What about strong demand from India?
Mr. Bridges: We’ve just come out of Diwali , an Indian celebration.
I don’t know if it was organized by the gold merchants, but I’m told
that you qualify for a better position in paradise the more you spend
on gold during Diwali. Then we go into the wedding season now, and that
too is a time when a lot of gold is bought. So this end of the year is
typically very strong for gold.
Mr. Foster: We’ve seen strong demand out of the Middle East, India
and Asia, as those economies have been booming. Seasonally, this is the
strongest time of the year for gold: You have holidays in India,
Ramadan in the Muslim world, and Christmas. Those are all strong
periods of buying.
India is the largest gold consumer in the world. So it does have a
huge impact. They have an affinity for gold. People in India, rather
than putting money in bank, might buy a gold bracelet. That’s not
jewelry, but a form of savings.
Online Journal: Have gold prices — and returns — kept pace with inflation?
Mr. Bridges: Gold has been remarkable in terms of holding its value
versus inflation. I saw a table on the Motley Fool site that showed the
performance of gold over 200 years, and suggested the price had held
its value. It hadn’t grown, but it had not lost value. It maintained
its value in real terms. That is something I don’t think anybody would
Online Journal: The nominal price of gold has remained relatively
constant since 1988, while the S&P 500 has quadrupled (as pointed
out this week by New Yorker financial columnist James Surowiecki). Does
that make gold a terrible investment?
Mr. Bridges: I have problems with the concept of gold as an
investment. Investment implies that the asset increases in value, and
we’ve just established that gold’s chief characteristic is that it
holds its value. But you’ve got various different categories of
investment in gold. If you are lucky enough to buy into an exploration
company that makes a discovery, you can effectively buy your own
autoteller machine. Some of these things are just phenomenally
Mr. Foster: When people think about investing in gold, many think
like they do when investing in stocks or bonds. The purpose of gold is
to provide portfolio insurance. Gold has a very low or even negative
correlation with most other asset classes. It is volatile and can have
Online Journal: So what is the best way to get exposure to gold, aside from robbing Fort Knox?
Mr. Bridges: Gold bullion itself — if you’re worried about where
currencies are going, worried about the level of stock market perhaps
– is about the safest you can do. Gold has held its value for
millennia, so that still has a role. It’s not a very popular role at
the moment, but it’s still there. Gold equities offer more convenient
access to exposure.
Mr. Foster: We think the best obviously would be to invest in a gold
fund. We invest in gold mining shares, which despite performance over
last couple of months, historically have good leverage to the gold
price, especially in a rising price environment. Historically, the XAU
has two times leverage to gold price.
Or you can invest in gold mining stocks — that’s an option — or in
the metal itself. There’s also a new vehicle now that just came out
this month, the streetTracks Gold Trust exchange-traded fund. That
broadens the gold-investment universe, if you will, and offers another
option for investors.
Online Journal: Some have said that buying gold is "the purest form
of speculation," since gold is valuable only as long as we collectively
agree that it is. How do you respond?
Mr. Bridges: I think it’s demonstrated an ability to maintain its
value more effectively than paper currency. During periods of
expansion, granted, gold appears to lose relative value, but the
historical record shows how it’s maintained its value. I don’t
understand that argument.
Mr. Foster: Gold has a very long history. It has a unique role in
the financial markets. It’s not a commodity like copper, or nickel or
iron ore. It’s recognized around the world like a currency –
transportable, divisible. It’s malleable, it has unique electrical
properties, it’s used in computers. It has intrinsic value.
What makes it such a great currency is that it’s got a limited
supply. Unlike the U.S. dollar, you can’t create gold virtually out of
thin air. You can’t print as much gold as you want to. It has a limited
supply. And so it is the ultimate form of currency and that makes it a
unique financial asset. It’s not, in the sense that you say, a
speculative instrument. It is a legitimate financial asset and has a
role to play in an investment portfolio.
Online Journal: Some of the current forecasts are for gold to reach
$1,000 an ounce. How realistic is this? Do investors anticipate a
Mr. Bridges: Well, there are lots of investors in this space. Some
are looking for more than $1,000. In 2003 dollars, the gold price has
been to $1,200 already. The $800 that gold achieved in 1979-80, if you
inflate it up to current-day dollars, it’s over $1,000 an ounce. We’ve
been talking about the inverse correlation between gold price and the
dollar. So $1,000 an ounce implies a dollar probably half the level it
is today, which is perhaps a bit of stretch.
Mr. Foster: I think there are economic scenarios in the global
economy that could get us a gold price of $1,000 an ounce. Looking at
the mood we’re in now, I don’t see any reason why the market can’t test
$500 in the next several months. If and when we get to that level, then
we’ll evaluate the markets at that point and determine whether we think
we can go higher from there.
But there are so many imbalances in the global economy, from the
shifts in currencies that we’re seeing, the tremendous debt levels that
are held in the U.S. The trade deficits, the extremely low savings rate
in the U.S. — these are things that can precipitate some sort of
financial crisis that could send gold into the four-figure levels.
What’s Buffing Up Gold? Is $1,000 a Real Target? 
By WORTH CIVILS
THE WALL STREET JOURNAL ONLINE
December 2, 2004 7:21 p.m.
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