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15 central banks agreed to sell gold { November 26 2004 } Original Source Link: (May no longer be active)
http://mahalanobis.twoday.net/stories/415485/http://mahalanobis.twoday.net/stories/415485/
Wall Street Journal
Friday, November 26 2004
Going Global
By Michael R. Sesit
Gold Shines on Dollar's Gloom
Paris: Gold is sparkling ever brighter, but its prospects as a long-term investment depend on how weak the dollar becomes.
Gold traditionally has been viewed as a hedge against weak currencies and, because it is denominated in dollars, a popular investment for people purchasing with euros, yen or whatever when the dollar is down. This rally has been no exception.
Yesterday, the dollar slid to another record low against the euro in the European currency's five-year lifetime, a nine-year low against the Swiss franc and a 12-year nadir against the Canadian dollar. It also sank to a new 4 1/2-year low against the yen.
No coincidence, then, that gold on Tuesday climbed to a 16-year high of $449.50 an ounce and floated around $449 on Wednesday, with some forecasters predicting a rise to $500. The price of gold is up about 78% from it 20-year lows of late August 1999. "The magnitude of this rally has out-stripped the two gold-price rallies of the 1990s; and in terms of duration, it's the longest gold-price rally in history," notes Michael Lewis, head of commodities research at Deutsche Bank in London.
Eager to cash in on the growing interest in gold, investment banks, asset managers and mining companies have been designing new investment products. Last week, streetTRACKS Gold Shares became the first exchange-traded fund backed by bullion to be listed in the U.S., on the NYSE. That follows similar gold ETFs--open-ended funds that track various equity and fixed-income indexes or, as in this case, commodities--in London, Australia and South Africa. A fifth is planned for listing on the AMEX.
"Clients have increasingly been asking for ETFs backed by gold and other commodities, given the forecast for a low-return environment for equities and fixed-income over the next few years," says Deborah Fuhr, ETF strategist at Morgan Stanley in London.
But gold's very popularity already is making some nervous--and before you put every last penny into betting the only way is up, it's worth hearing the caveats. "gold is the new snake oil," contends Andrew Smith, an analyst at Mitsui Global Precious Metals. He notes that it is being touted as a balm for geopolitical woes, an antidote for both inflation and deflation, a relief from the headaches of dollar depression, a speculative pick-me-up for low-return stock and bond markets and a cure-all for the world's economic problems. "The [gold] industry is trying to institutionalize gold as an investment; and that's dangerous," he says. "The fact that we're testing it now indicates we're at the top of the market."
To some degree, investors betting on gold also will find themselves on the other side of the poker table from many of the world's central banks. With 32,000 tons of gold--roughly 12 years of new mine production at current reates--central banks and other official institutions are the world's biggest holders of bullion. Impressed by their own ability to control infaltion, central banks some years ago began to question their need to hold gold as a reserve asset and many began offloading part of their holdings, putting a damper on the market and unnerving investors and mining companies. The fear that this selling would overwhelm the bullion market and drive prices ever lower was initially allayed by the Central Bank Gold Agreement of 1999, in which 15 of the world's biggest gold holders pledged to sell gold at a pace the signatories felt wouldn't disrupt the market. The same 15 renewed the agreement in March, vowing to limit their combined gold sales to 500 tons a year for five years. Nonetheless, these huge gold holdings could be seen as a long-term threat to gold prices, if the central banks have a change of heart or if deficit-strapped governments want to use the proceeds from gold sales to reduce deficits.
France last week announced it intends to sell up to 600 tons over the next five years. What's more, national central banks at the 12 nations that are in the euro zone still hold gold reserves even though the ECB is in charge of setting monetary policy for the area. That means the national banks' task has become more to act like asset managers, maximizing the returns of the assets they hold--something that could eventually prompt them to sell some of their gold either to take profits, reallocate the money, or diversify their investments.
But don't mention that to gold fans. Explaining gold's ascent, John Reade, a precious-metals analyst at UBS in London, points to the weak dollar and an increased physical demand for gold, particularly for jewelry, from the Indian subcontinent, Turkey and East Asia. He adds that the liberalizaton of China's gold market has improved the prospects for increased Chinese jewelry demand following six years during which fabrication demand was depressed.
To Deutsche Bank's Mr. Lewis, the environment for gold has done nothing less than undergone a "regime change." The decade of the 1990s, he says, was marked by rapidly rising equity markets, which diminished gold's defensive appeal. And during the second half of the 1990s, the dollar rallied strongly. In contrast, the current decade has been one of skittish stock markets and rising geopolitical risks. Meanwhile, the dollar has been falling. In late European trading Wednesday, the euro stood at $1.3154 and the dollar at 102.87 yen. The pound bought $1.8803. Mr. Lewis says gold should climb to $480 an ounce as the dollar falls to $1.46 to the euro and 86 yen over the next two years.
Mr. Reade sees gold receding to about $430 an ounce in the first quarter of 2005, then rising to peak at around $460 in the fourth quarter. Prices should then fall back, mostly on the back of reduced demand relating to a slowing global economy. Mr. Reade predicts gold will average $440 next year and $5 less in 2006.
The long-term case for gold is that "twoday, no country wants a strong currency, mainly due to the competitive manufacturing pressures of globalization," argues David Fuller, head of Fullermoney.com, a division of Stockcube, Research Ltd. Mr. Fuller sees the metal's price going " a lot higher over the next 10 to 15 years." How high depends on how much central banks debase their currencies.
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