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Investment driving gold rally
David McKay
Posted: Fri, 23 Sep 2005

[miningmx.com] -- JEFF Christian, MD of metals research house, CPM, is the kind of analyst who’s optimistic about the price of gold without necessarily being a gold bull. Commenting recently in Johannesburg about the future of gold, Christian said investors showed evidence of holding more gold for longer, but he doubted the metal would long burst through $500/oz, or even get that close.

“There’s a greater resiliance to hold gold, as well as platinum and palladium, for longer (since World War Two), but it’s because investors have nowhere else to put their money,” Christian says. “But in the long-term, gold can’t stay at current levels for long because it encourages additional production and encourages disinvestment.”

The idea is that investment demand for gold, from institutions and bullion traders, is the swing factor pushing gold to its current multi-year high levels. But the investment demand is also a temporary phenomenon.
There’s a greater resiliance to hold gold
The long positions on Comex are instructive of modish investment interest in gold. Between 2000 and 2002, long positions in gold accounted for some 2 million oz. This compares to the 12 to 14 million oz currently held by investors (and rising to 19 million oz in August), believing the price will continue to rise. So far, they’ve been right. But how long can it last?

“Gold prices will remain strong but we don’t believe they are pushing $500/oz or $5,000/oz in 2006,” says Christian. He believes the metal will trade between $430/oz to $470/oz for the remainder of 2005.

And yet the troubling reality for forecasters is the incredible momentum provided by the Chinese economy; such is the rate of growth, that there’s also a question hanging over whether the world economy has changed for good.

Chip Goodyear, CEO of the world’s largest mining company, the $95bn BHP Billiton, believes the emergence of China as the world’s engine is hardly a temporary phenomenon. “The reformation in China has been under way for 15 years when its leaders saw the example of Soviet Russia,” he said. Goodyear was speaking before the Investment Analysts Association in Johannesburg.

About 25 to 30 years ago, Japan was BHP Billiton’s largest market. “Now China is the critical driver of our business”.

The scope of growth is mind-boggling on any number of fronts: for instance, the country’s infrastructural development is so rapid that it builds or expands a city equal in size to Boston every 12-18 months. “There’s a drive to improve the quality of life in China,” says Goodyear. This means migration of people to urban environments. “The most dangerous thing is for that to stop. Currently, between 20 to 30 million people per year are moving to urban areas,” he says.

Christian acknowledges the world’s economy has made a critical turn. “The world is moving towards a consumer economy away from an export economy,” he says. Whereas in the 1990s, China exported its goods, it is now a major importer. And while gold jewellery demand, for instance, does not drive the price, it nonetheless provides a critical floor to investment demand.
China is the critical driver of our business
Seen in this context: the turn to a consumer economy, the world’s producers flooded with money, and the catalytic effects of political uncertainty, the view that dollar weakness has been underpinning the price of gold is just a contributing factor not its primum mobile.

Although there has been a 70% to 80% inverse correlation between the dollar and the gold price, over time the correlation is only 7%. “This means that you would have lost your money 93% of the time,” says Christian. Currencies in general will move sideways, but remain volatile. “This will be good for gold,” he says.

Ultimately, deciding where gold is going is anticipating what US president, George Bush, might do next, says Christian. “There’s no knowing what investors will do.”