Gerard Holden, chairman, Brinkley Mining
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Fundamental top for gold price, says Holden
Allan Seccombe
Posted: Thu, 29 Jun 2006

[miningmx.com] -- THERE is no fundamental reason for the gold price to move much higher than it is now, the US interest rate cycle is nearly at its peak and the base metals market undergoing a much-needed correction, Gerard Holden, the former managing director and global head of mining and metals at Barclays, said on Thursday.

Pension funds are likely to become buyers of gold-backed exchange-traded funds, which have bought a degree of volatility to the bullion market, once the instrument is fully understood, he told Miningmx in an interview.

“My own gut feel is that there is $100 to $150 per ounce of geopolitical risk premium in the gold price at the moment,” he said. Worries about conflict between the West and Iran over its nuclear programme and the effect on oil supply and prices was one of the drivers of the gold price.

“If the world had to return to a more stable environment, which I don’t see it doing in the near term, we could see that come out of the gold price,” he said. “I don’t see any fundamental reason why gold should be significantly higher than where it is today.”
no fundamental reason why gold should be significantly higher
The gold price has pulled back from its extremely quick run up to a 26-year high of $730 on 12 May, before falling back to $583 in late afternoon South African trade on Thursday.

Some producers have been talking of gold going to $1,100, but Holden said he would be very surprised if it went as high as that. “There is very little from a fundamental perspective to move it in that direction.”

The US Federal Open Market Committee is widely expected to raise interest rates by 25 basis points on Thursday to 5.25%, which would be the 17th hike in a row and thrust rates to a five-year high.

Holden said it was not an impossibly high number for companies to live with, and he saw the cycle peaking at six percent either by the end of this year or early 2007.

“It’s not surprising from the dollar perspective that we are getting interest rates towards the top end of the cycle, given we had interest rates at incredibly low levels for a significant period of time,” he said. “It’s still a lot cheaper than equity.”

“I think we’ll move up to six percent, but even that is not the end of the world, then we’ll start to see US rates come down after a period and move into lower interest rates over the next five to seven years.”

MUCH-NEEDED CORRECTION

The rising interest rate cycle in the US and other countries around the globe was one of the triggers for an exodus out of red-hot commodity markets stoked by frenetic fund buying and speculators pushing prices to record highs.

The downturn in prices is a healthy correction, Holden said, explaining it would shake out some pretty frightened investors who didn’t know what they were doing.

“To my mind, the prices were getting way, way over done. People were getting involved in a sector as investors who had absolutely no idea of what they were buying,” he said. The metals markets are complex at the best of times, but they had became even more so in the recent volatility.

“I would argue that many people have been investing in base metals markets with absolutely no understanding of the intricacies of those markets.
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“It had become very much a fashion trend for investors to buy into base metals, to say 'I’m long of copper, zinc or nickel' because everyone else was doing it. The increases in copper prices were absolutely unsupportable from a fundamental perspective,” he said.

The fundamentals behind the market remain sound for a more considered increase in base metal prices, he said. Extra capacity is only coming slowly on stream, while the big economies are still gulping down commodities, which means there will be deficits for a number of metals.

“This is a well needed correction. It’s probably got a little bit further to go, but we are coming to the end stages of the correction and there are fundamentals of good, strong demand and moderately restricted supply,” he said.

While base metal prices have pulled back, they are still high by historical standards. Against that, however, are high costs coming from energy and other inputs. Holden reckons on average mining companies’ costs have gone up 25% to 35%.

Chris Thompson, the former chairman of the World Gold Council, said this week at the London Bullion Market Association, that once the ETFs had absorbed 3,000 tonnes in the next five years, major investment funds would be attracted to the investment instrument. There is now a total of 500 tonnes of gold backing the ETFs.

Holden echoed Thompson’s views, saying pension fund managers, for example, wanted to see a track record and monitor how the instrument behaved in various scenarios before investing money in them. The gold ETFs have been in existence for about three years.

“Most investment fund managers would have trouble disputing why one shouldn’t have an element of gold in one’s portfolio,” he said.