Investing in gold
July 23rd 1999 10:11
I lived in Hong Kong for 16 years until 2007. In 1998 and 1999 I wrote a series of political and social commentaries for a quirky institutional newsletter - quirky in that it was intended to be as much contentious, offbeat and humorous as it was informative. I was working as an editor, and I wrote the articles under the pseudonym Red Inque. I post them here for anyone interested in a look at life in Asia at the time, and in Hong Kong just after its return to Chinese sovereignty.
All that glitters ...
Many years ago, back in the good old days before the Great Asian Discombobulation, Red Inque, young, innocent and newly arrived in Hong Kong from Australia, sat in a restaurant with a beautiful Chinese woman and watched her eat a fish head.
She did it with both dexterity and daintiness, and with a relish which almost, but not quite, convinced Red to try the head.
Finally, the meal was finished. The young woman cleaned her hands, fixed him with her beautiful, almond-shaped eyes, ran her tongue across her lips, and murmured, “Do you think the price of gold will rise soon?”
Red went red, but then launched into a nervous discourse, the content of which owed much more to hoped for rewards of a non-fiscal nature than any great knowledge of the subject.
“Sure,” he blustered. “It’s been depressed for so long it must rise soon.”
That was eight years ago. Gold never did get it together, and neither did Red and the Chinese enchantress.
Today, of course, Red is older and wiser, and in the same position he would know to smile urbanely, fix those lovely dark eyes with his own, and murmur a seductive reply along the following lines. Gold is now at US$256 an ounce, a 20-year low and just 30% off its US$850-an-ounce peak in 1980. It has very limited downside from here because:
Gold is now close to the global average cost of mining of US$230 an ounce. If gold fell below the cost of mining, new supply would cease.
For 10 years or more, the world’s banks have been driving down the price of gold by borrowing it from central banks at low interest rates (currently about 1%) and then selling the gold on spot markets to generate funds which can earn much more than 1%. Currently, about 8,000 tonnes of gold are on loan from global central banks to trading banks – a figure which represents 3.1x average annual gold production and continues to grow as banks keep rolling over repayment of the physical gold. Now, as the price approaches its production break-even price, this trend will have to reverse. Once production starts to become unprofitable, output will decline, and central banks’ reserves will become the major source. Once that source starts to run low, trading banks will have no choice, as their gold loans fall due, but to go to the spot markets to buy the commodity. As banks start to cover their short positions, the price of gold will rebound.
Negative sentiment towards the gold price has been generated by the stated intention of the IMF, the Bank of England and Switzerland to sell 2,100 tonnes of gold over the next five years or so. In our view, this will give banks the opportunity to cover part of their gold loans, but it will be insufficient to stem the reversal.
Global gold production has lagged final demand for the past five years, the difference being the lending of central bank reserves. As we have said, we foresee this lending drying up.
There have always been two main reasons to buy and hoard gold. The first is risk insurance: gold is a hedge against anything from economic crisis to Y2K meltdown. The second reason to hold is speculation: precious metals are trading at 20-year lows and are overdue for a significant correction.
All of which is a great reason to read our new report on RNA Holdings (0501.HK). Anyone who doesn’t contact us for a copy needs their head read.
All that glitters ...
Many years ago, back in the good old days before the Great Asian Discombobulation, Red Inque, young, innocent and newly arrived in Hong Kong from Australia, sat in a restaurant with a beautiful Chinese woman and watched her eat a fish head.
She did it with both dexterity and daintiness, and with a relish which almost, but not quite, convinced Red to try the head.
Finally, the meal was finished. The young woman cleaned her hands, fixed him with her beautiful, almond-shaped eyes, ran her tongue across her lips, and murmured, “Do you think the price of gold will rise soon?”
Red went red, but then launched into a nervous discourse, the content of which owed much more to hoped for rewards of a non-fiscal nature than any great knowledge of the subject.
“Sure,” he blustered. “It’s been depressed for so long it must rise soon.”
That was eight years ago. Gold never did get it together, and neither did Red and the Chinese enchantress.
Today, of course, Red is older and wiser, and in the same position he would know to smile urbanely, fix those lovely dark eyes with his own, and murmur a seductive reply along the following lines. Gold is now at US$256 an ounce, a 20-year low and just 30% off its US$850-an-ounce peak in 1980. It has very limited downside from here because:
Gold is now close to the global average cost of mining of US$230 an ounce. If gold fell below the cost of mining, new supply would cease.
For 10 years or more, the world’s banks have been driving down the price of gold by borrowing it from central banks at low interest rates (currently about 1%) and then selling the gold on spot markets to generate funds which can earn much more than 1%. Currently, about 8,000 tonnes of gold are on loan from global central banks to trading banks – a figure which represents 3.1x average annual gold production and continues to grow as banks keep rolling over repayment of the physical gold. Now, as the price approaches its production break-even price, this trend will have to reverse. Once production starts to become unprofitable, output will decline, and central banks’ reserves will become the major source. Once that source starts to run low, trading banks will have no choice, as their gold loans fall due, but to go to the spot markets to buy the commodity. As banks start to cover their short positions, the price of gold will rebound.
Negative sentiment towards the gold price has been generated by the stated intention of the IMF, the Bank of England and Switzerland to sell 2,100 tonnes of gold over the next five years or so. In our view, this will give banks the opportunity to cover part of their gold loans, but it will be insufficient to stem the reversal.
Global gold production has lagged final demand for the past five years, the difference being the lending of central bank reserves. As we have said, we foresee this lending drying up.
There have always been two main reasons to buy and hoard gold. The first is risk insurance: gold is a hedge against anything from economic crisis to Y2K meltdown. The second reason to hold is speculation: precious metals are trading at 20-year lows and are overdue for a significant correction.
All of which is a great reason to read our new report on RNA Holdings (0501.HK). Anyone who doesn’t contact us for a copy needs their head read.
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