Gold Fever

Intheblack, Jun 2008 by Parkinson, Giles

AFTER FALLING INTO THE DOLDRUMS IN THE 1990s, GOLD PRICES NOW SHINE AGAIN, BOTH AS A HEDGE AGAINST THE LOW US DOLLAR AND AS A PORTFOLIO DIVERSIFICATION TOOL

Philip Bruce is a 30-year gold industry veteran, and well remembers the days when prospecting teams would set out for months at a time with their swags and tents to trawl across the Australian outback in search of the next big gold find.

Those were romantic and exciting times, but they've faded into the distance. Nowadays, there's not much prospecting done at all, at least not in Australia. Exploration continues, but it's much more of a passive game as powerful computers, remote sensing and geophysical work take centre stage.

However, Hill Hnd Gold, the company that Bruce heads, has a project in Laos, and sends out the occasional team along the Ho Chi Minh Trail and back down the Mekong River. "They put in five-hour hikes, sleep in the houses of the village head man," Bruce says. "There's still a bit of adventure in the industry, but to find it you need to go to the frontier areas."

It harks back to the days, says Bruce, when gold exploration was as much an art as it was a science. "You'd follow your nose and sort of trip over the good stuff. You've got to be a bit more scientific now. You've got new techniques and more powerful computers can resolve the subtleties in electromagnetic responses. A lot of areas have been mined in an ad hoc way. You know that if gold has been found there before, you can probably find more."

Which is why you find many gold companies such as Hill End returning to the sites of famous goldmines of Australia's past. For the past 15 years. Hill End itself has been working the goldmine at the town of the same name, just west of the Blue Mountains. It is the area of Australia's earliest gold reef mining and the discovery of the largest single specimen ever mined, the 3100 ounce Holtermann nugget (87.88kg) that was extracted in 1872.

Mining at Ballarat, one of the great Victorian gold rush towns of the 1850s, is also due to resume this year, while other companies are looking to consolidate the workings around the WA town of Coolgardie and create a viable project. "Gold production has been decreasing in Australia, particularly over the last 10 years," says Peter Arden, a senior research analyst at Ord Minnett. "We just haven't had any major gold discoveries, and companies are going back and looking at older areas."

They are being helped, of course, by a surge in the gold price in mid-March that took it over US$1000 an ounce for the first time. Gold, for so long considered a safe-haven investment, fell into the doldrums in the late 1990s, forcing marginal operations to close and exploration to dry up. But a steady rise since then - initially based on the basic fundamentals of supply and demand and then a renewed flight to safety following the credit crisis - has meant that high-cost operations or more complex ore-bodies can now be tackled with renewed optimism.

Natalie Dempster, head of investment research at the World Gold Council, says that apart from renewed demand for gold as a safehaven asset, the other features of recent trading in gold has been its use as a hedge against the US dollar: as the US dollar goes down, the gold price rises. She says this "negative relationship" has become more pronounced in recent years. Gold is also used as an inflation index, and has been rising in tandem with the oil price.

Dempster says gold has also become more attractive for investors in search of new ways to diversify their portfolios. Gold is attractive as an alternative investment because it does not move in line with bonds or equities or other alternative assets. A number of large, US-based pension funds and institutional investors such as Calpers and BT have invested heavily in gold in recent years, with some lifting their allocations in hard commodities to 30 per cent.

Retail investors have also found new ways to enter the gold market, particularly following the recent introduction of exchange-traded funds (ETFs). They were introduced by the World Gold Council in response to a survey conducted to find out why many people did not buy gold. The answer was that not everyone wants to stick a gold bar under their bed or in a bank vault, or even buy gold coins.

The ETFs comprise shares that equal one-tenth of an ounce of gold and can be freely traded on the stock exchange. The first ETF was listed in Australia in March 2003, and now 10 exchanges across the globe feature ETFs, with a total of US$28 billion invested. "They've been phenomenally successful," says Demptser. And, with the rise in the gold price in recent years, investors have done well, too.

ETFs are soon to extend to India and the Middle East. Other financial products are also being launched around the globe: China's first gold futures contract began trading this January, and a gold-linked bond aimed at small investors is planned for Japan. Options, warrants and certificates are available in most Western markets.