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Gold as religion

AT the time of writing, the spot price of gold was at $1,298.25 per ounce, equal to some R292,000 per kilogram. Worried, or euphoric?
 
Gold price views are near religious debates, but as with any discussion about deities, the truth is a question of belief. Sceptics think it's a matter of time before investment demand dries up. According to a recent article by colleague Brendan Ryan, who listened to Paul Walker of GFMS on the subject at the Denver Gold Conference recently, the last time investment demand turned neutral on the gold price, in 2007, some $200/oz disappeared off the gold price in two months.
 
Ryan also gave some airtime to Martin Murenbeeld, the hugely respected North American economist who's been right more than wrong about the gold price. Murenbeeld is influenced by the position of central banks which have become net buyers of the metal.
 
For once, I'm going to join popular belief on gold, effectively running into the streets with my palm leaf declaring the great coming of the metal. The slightly less hysterical, but equally convicted economist, Chris Hart, Investment Solutions’ chief investment officer, takes a similarly optimistic view of gold.
 
"The central banks have turned net buyers which is a huge shift in the supply/demand equation," he says. It's a position in reaction to the poor fiscal and monetary management of the world's developed economies, says Hart. The only way to hedge against the economic effects that have led to the age of austerity as it's called is to buy hard assets. "Gold will go through to $2,000/oz as long as there is debasement of the monetary system," he says.
 
The view is that central banks are helping to underpin normal investment demand, which can be flightly or fickle; hot money as it's also described. It's a view partially supported by the VM Group which last month produced a fascinating report on central bank activity. It found that even with a 30-year period of relentless gold sales behind them, central banks own 30,520 tonnes (as of end-July) equal to some 12 years of mine supply at current levels.
 
According to VM Group, there are four distinct types of central bank behaviour regarding gold reserves over the last half century: the era of reserve guarantees, the era of reserve mobilisation and portfolio management, the era of gold sales, and now the era of reserve sobriety.
 
We all know about the period of gold sales captured by the splendidly dramatic Central Bank Gold Agreement (CBGA) which in 1999 set official sector gold sales for its signatories - 15 European central banks - at 400 tonnes per year (2000 tonnes over a five-year period). The agreement gave resource journalists column centimetre after column centimetre of material the crux of which was the question: would the CBGA be renewed or would the gold market degenerate into an anarchy of opportunistic selling forcing the gold price ever downwards?
 
In the era of reserve sobriety, VM Group believes that although the recently renewed CBGA has recommended no more than 400 tonnes/year of gold sales by its signatories, there's unlikely to be much selling. It hastens to add, however, that the lack of gold sales should not be conflated with a willingness to buy gold.
 
Interestingly, it refers to the speculation earlier this year in which it was suggested some of the PIIGS, Portugal in particular, collateralised their gold with the Bank of International Settlements (BIS), but believes the current crop of central bankers still view gold as "an anachromism".
 
What we are seeing, says VM Group, is gold doing what gold does best: a hedge against economic uncertainty. In the Eurozone, gold reserves have fallen 13% since the adoption of the Euro but by value, bullion reserves are 88% higher for Europe's central bankers. This would suggest selling will resume at a point in time, but not quite yet.
 
"Central bankers may still harbour an inclination to sell gold, but their political masters, under pressure of the almost total collapse in confidence in paper assets, have lost all their erstwhile eagerness to shovel the bullion out the back door," says VM Group, adding: "And quite rightly, too".
 
Nationalisation
 
I declared myself weary at a recent news conference at Fin24 of the nationalisation debate. There has been an enormous amount of to-ing and fro-ing on whether the country will adopt this policy.

Foreign investors might normally heed the South African government's claim that nationalisation really isn't an agenda item. But they can't trust our government which has too often jolted investors by changing tack on things like empowerment legislation. The next iteration of the mining charter is due and there's no clarity on whether an empowerment deal by a mining firm empowers it forever, or whether it must keep redoing deals.
 
How can any of us sleep peacefully when, now, the ANC's general council has been forced to place nationalisation on the party's agenda, the outcome of which will only be known in 2012? That's like chucking a time bomb into the country's mining industry.
 
The ANC Youth League, which has been pushing for nationalisation, really doesn't have a proper plan for how it will work. But that never mattered. Quite simply, it's been using nationalisation of the mines as a stick to beat President Jacob Zuma for his inability to deliver on other social projects.
 
Now it's an agenda item. What are investors supposed to think? For starters, better stick to gold ETFs rather than shares in South Africa's gold miners.
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