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June - July 2007

Business Forum

The Gold Equation

by Sachin Pattni

Why is it that Gold has always been such a wise investment? Coming from a family of jewellers, I have found that our business has always relied on either family occasions, be it weddings or birthdays; or families seeking gold as a method of investing surplus cash into an asset. As we have seen in the past, currencies can fluctuate to the extent that 1Mn Tanzanian Shillings is now worth just shy of $700, in which case it can be possible that investors could have done better buying into gold in the past. And what is the future for this yellow precious metal? Should we be buying or selling gold, that is to say, should we be bullish, or bearish? More importantly should we speculate?

A few years ago investors were “knocked for 6” when gold prices hit lows of $255/oz, however those who had their wits about them and stayed put were rewarded with a recovery around two years ago to $430/oz. Although an extraordinary turn around, the subject of gold and its future, were plagued with pessimism for the following few years. This stigma was well and truly removed and the bulls were literally laughing all the way to the bank when gold hit over $700/oz early last year. Astounding as $700/oz was at that time, analysts now predict gold to reach $1000/oz by end 2008.

The world’s primary production of gold has been in supply deficit for the last 15 years, mines nearing exhaustion and difficulties finding new supply, have meant that we have had to drastically change our play on gold. Jewellery production, geopolitical tension, and US dollar dementia not to mention US inflation (the US still keeps 75% of its foreign reserves in gold) are other factors that have brought us to reality on expectations. What is next for gold? A rolling stone gathers no moss, are we in store for a rally? Will we see $1000/oz?

Gold has traditionally been dubbed as “defensive” by the Bulls; inextricably related to the dollar. The inability of the world to keep peace and of course the concurrent supply-demand issues that grow as production increases in India & China means this a commodity that remains on the front-line.

Last year, supply of traded gold fell by 5%, production of newly mined gold fell by 70 tons

Why invest now? To answer this we should look at the facts again. The dollar looks set to decline further, the economic growth in US is slowing, and inflation is up. Potential geopolitical turbulence rumbles yet again in the Middle East, supply remains soft and demand stable after adjustment by jewellers to the higher prices. Gold prices remain between trading range of $640/oz and $680/oz, facing doubtful resistance, however with the other precious metals like silver running ahead, it’s only time before we see it breach $700 and onwards. Speculator? Bear in mind the potential $40 downside, however it is my belief that were the price to bow to $620-$640, buyers will buoy it back up again.

But that’s not all folks! Investing in gold, traditionally, uses shares/equities in gold mining companies or physical stock. We have had a bumpy ride in equities recently which has cost us potential gains from gold stocks, and of course bullion can be costly to hold and store. Investors increasingly now turn to Gold Funds (known as Exchange Traded Funds (ETF’s)) as a method to invest in the asset. An ETF being a fund traded on exchange like any normal share that invests long/short or leveraged and hedged in one specific asset, for example gold. With large, liquid funds investing in an asset class like gold, investment into gold has increased, with ETF’s generating a third of new investment into gold, and growing; which keeps the demand for Gold high. What this should show us is that there seems to be a strong speculative potential to gold. The bulls laughed once before, they may laugh again. In my opinion, I would support a price of $800/oz by end 2008.

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