SYDNEY, 26 September 2005 — Gold’s rally to its highest price in nearly two decades as another hurricane whips toward the US Gulf coast has reinforced the precious metal’s reputation as a smart buy in times of trouble.
Speculators have bet on rising oil prices igniting inflation in the United States, chipping away the value of fixed investments such as bonds. Such a scenario is a cue for gold — the hardest of currencies — to shine.
“There is a lot of speculation out there that is driving the price,” said ANZ Bank sector analyst Andrew Harrington. Gold zoomed up to $475 an ounce last week as Hurricane Rita bore down on the Gulf of Mexico, forcing US oil refineries to shut and coastal residents to seek refuge on the Texas prairie.
Ian Telfer, chief executive of sector heavyweight Goldcorp Inc., last week predicted gold would sell for $500 an ounce by the end of the year and $800 a year or two after that. The record is around $850 an ounce, hit in early 1980.
In the wake of Hurricane Katrina, there is an expectation US economic growth will falter and slow the pace of interest rate hikes, which some argue will keep investors from Dubai to Shanghai buying gold.
“Some trimming back of US rate hikes reduces gold contangos and hence the incentive to sell gold forward,” said Commonwealth Bank of Australia commodities strategist David Thurtell.
When the price of gold rises at a higher rate than the contango, or the premium on the price for future delivery, it doesn’t pay to sell forward because the gold must be bought back above the contract price at maturity to complete the trade.
“And if interest rates don’t rise as much as previously expected, the opportunity cost of investing in gold is not as high, so Katrina has been good for gold,” Thurtell said.
But how good?
Bullion toppled almost $10 in the last US trading session as Rita weakened to a Category 4 storm and oil prices recoiled. It is now trading at $465.25 an ounce.
Some economists believe the US Federal Reserve will keep raising interest rates because it fears inflation more than the harm energy prices will do to economic growth.
The Fed raised rates on Tuesday by a quarter percentage point to 3.75 percent and stressed the economic impact from Hurricane Katrina would be temporary, while soaring oil prices could fuel inflation.
Gold bugs point to prospects for central banks, which already hold around 32,000 tons of gold, to step up purchases. This was supported by comments this month by Argentina’s central bank operations head, Juan Basco, that his bank may raise its gold holdings beyond 54.8 tons, or 3 percent of total reserves.
“But let’s keep it in perspective here,” said Thurtell. “Gold sales by all central banks in the first half doubled from a year ago and hit record levels,” said Thurtell.
Official sector sales in the first half of 2005 reached 407 tons, the highest half-yearly level ever recorded by industry consultants GFMS and more than twice the total for the first six months of 2004. Net sales for the full year were expected by GFMS to rise 40 percent.
And while the industry-funded World Gold Council noted global demand for gold in the second quarter rose 14 percent to 949 tons, miners are digging deeper to find new lodes, adding to supply. Prospectors worldwide are spending about $5.1 billion on exploration this year, much on finding more gold, and nearly as much as they spent at the peak of the last exploration boom in 1997, a survey by Metals Economics Group of Canada showed.
Newmont Mining Corp. is the world’s largest gold miner, followed by AngloGold Ashanti Ltd. and Barrick Gold Corp.
