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World Gold Council''s bullion fund doesn''t have the gold it claims to have
What's Buffing Up Gold?
Is $1,000 a Real Target?
Analyst, Fund Manager
Give the Goods on Gold
By Worth Civils
The Wall Street Journal Online
Thursday, December 2, 2004
Gold prices have surged 50 percent 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 United States, dating 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
percent since late 2003, but the Amex Gold Bugs
index (a basket of gold stocks) is down 11 percent
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
percent. 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 percent. Gold prices
are up 20 percent. So you look over that longer time
frame, and the shares have done fairly well. They've
significantly outperformed gold.
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
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 profitable.
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 big swings.
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
Mr. Bridges: I think gold has 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 has
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 sustained rally?
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
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
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