The price of gold closed on Nov. 24 at $390.95 US per ounce, marking about a 20 percent rise from a year ago.
Is the momentum running out of steam? No.
Gold briefly surpassed $400 per oz. last week for the first time in more than seven years. I anticipate it will reach $415 in 2004 followed by levels of $425 the following year. There are several reasons for this:
- Supply will continue to decrease because producers in recent years reduced exploration expenditures when gold prices were down.
- The average grade of deposits has decreased by about 25 percent over the past five years.
- There is a high probability that European central banks involved in the Washington Agreement will agree to renew in 2004. The agreement would limit official bullion sales for five years.
- Consumer demand is increasing in India, a country regarded as the largest consumer of gold, representing about 20 percent of world consumption.
- China, which represents about seven percent of world demand, will see its government buy more gold, primarily to back foreign exchange reserves.
- More exchange-traded funds will be based on gold bullion for North American and European markets, facilitating investment demand, especially among retail investors. Australia was first out of the blocks with a new equity listed bullion product in 2003, equal to one tenth of an oz.
- Geopolitical uncertainty, such as terrorist activity in Iraq and the Middle East.
- U.S. dollar weakness resulting from fiscal deficits and continuing trade imbalances. There is a strong historical relationship between a weaker U.S. dollar and higher gold prices.
- Persisting low interest rates in the U.S. There is a strong historical relationship between negative real interest rates, when short-term rates are below inflation, and strong gold prices.
- Gold producers will try to reduce hedges. For example, Barrick Gold Corp. has announced it is eliminating its hedge book. Hedging is a risk management tool that producers use to protect themselves from falling gold prices.
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Two funds available in Canada that provide exposure to bullion without physically holding it are the Central Fund of Canada Ltd. and Central Gold-Trust closed-end funds. Consider these securities as alternatives to the high cost of buying and selling gold bullion or coins directly. Also, they are eligible as Canadian content investments in registered portfolios such as Registered Retirement Savings Plans.
Central Fund of Canada Ltd. is a specialized closed-end investment holding company. Its investment mandate is to hold a minimum of 90 percent of its non-cash assets in gold and silver bullion, primarily in bar form. All bullion is physically stored on an allocated and segregated basis in bank treasury vaults in Canada.
As of Nov. 24, the closing price was $6.45 per unit. It trades on the Toronto Stock Exchange under the symbol CEF.A.
Central Gold-Trust is also an investment holding company. Its investment mandate differs slightly in that more than 90 percent of its non-cash assets are in gold bar form and up to another six percent are invested in gold certificates.
As of Nov. 24 the closing price was $22.16 per unit. It trades in Toronto under the symbol GTU.UN.
Other investments, such as precious metals funds and common stock, are available for indirect metal exposure. Given the strong movement in gold equities this year, it is debatable whether it is prudent to own bullion instead of equities, especially given that gold has outperformed stocks in about six periods over the past 30 years.
I suggest you contact your investment adviser as to the appropriate bullion-to-stock mix within your portfolio.
Ian Morrison is an investment adviser with Wood Gundy Private Client Investments in Calgary and is licensed to sell insurance products. His views do not necessarily reflect those of CIBC World Markets Inc. or The Western Producer. Morrison can be reached at 800-332-1407 or by e-mail at ian.morrison@cibc.ca.
