Heavy METAL

Friday 4th August 2000

Source: Statistics New Zealand

Precious metal investors had a rough 18 months if they were involved in gold and silver, but would be happy if platinum was their choice.

End-month prices for gold, silver and platinum on the London market since the end of 1999 are in Table I, while Tables II, III and IV list prices for each of the three metals since 1996. The 1999 high for gold was recorded on October 5, having gone from close to the year's low in two weeks and spending most of the year at prices described as the lowest for 20 years.

There has been a steady slide since October. Prices this year moved in a relatively narrow range, after peaking at $US313 on February 11. Overseas reports earlier in the year said analysts expected the gold price to be volatile in the medium term as the market reacted to any sales of central bank holdings and suggestions that people who accumulated substantial short positions last year had rebuilt.

The big price rise late last year was said to relate to a decision by European central banks to limit sales. Large investors seem to have quietened down recently, as shown in the reaction to the Bank of England's auction of 25 tonnes of gold on July 12.

The Financial Times reported the response to the auction was poor. It was only 1.3 times oversubscribed, the lowest level of interest since the bank began its auctions. Covers at earlier auctions ranged from 2.1 in November 1999 to eight times in September. The allotment price of $US279.75 an ounce in July was below recent market levels.

The Financial Times quoted analysts as saying the poor response was due to "summer doldrums," while the World Gold Council, described as "a pressure group founded and funded by some of the large gold miners," criticised the auction, as it had criticised all the earlier ones.

NBR Personal Investor's last survey of precious metals in 1997 noted industry experts had said individuals and institutions owned about 60% of the world's "above-ground" gold at that time and were the key element in the supply-demand equation.

Only a third of the world's gold stock was held in central banks. Last year the Bank of England said it would sell about 60% of its gold reserves (450 tonnes) and there were suggestions other central banks might reduce their reserves. That was before the European central banks agreed to limit sales.

The situation for the platinum price has been markedly different from that for gold. The price took off last year, after three fairly static years. It hit $US580 an ounce at the beginning of July, 30.92% higher than the $US443 at the close of 1999.

Buyers were said to have ignored a warning from the Platinum Guild, a marketing organisation, that demand for platinum jewellery in Japan was likely to be flat this year, compared with an earlier estimate of a strong rise. Platinum jewellery is popular in Japan, although the Asian economic crisis dampened demand.

Overseas reports say about half the world demand for platinum is from the jewellery industry, with the rest being taken up in electronics and motor vehicle catalytic convertors.

Michael Hill International manufacturing manager Laurie Mayo told NBR Personal Investor heavy demand for platinum jewellery also came from the US and elsewhere. For example, his company recently put large diamond rings into its retail stores and three-quarters of them were set in platinum. Unlike gold, platinum is used in jewellery as a pure metal.

"It lasts forever and is very dense - one-third more dense than gold," Mr Mayo said.

Gold in jewellery is worked in alloy form, the carat content, because it is a soft metal. Nine-carat is 37.5% gold, 18-carat 75% and 24-carat 99.999%. When the Financial Times reported on Anglo-Gold's decision to buy 25% of Oro-Africa, South Africa's largest gold jewellery manufacturer, it said more than 80% of the world's gold was used in the manufacture of gold jewellery and retail sales of gold jewellery in the US alone were $US14.7 billion in 1999. (Anglo-Gold is the world's largest gold producer and the company's chief executive was quoted as saying the move with Oro-Africa was part of his company's continuing strategy to extract as much value as possible from gold.)

The use of gold in the jewellery industry has increased steadily in the past decade, going from 69.7% of total demand in 1990 to 77.6% in 1994 and then to the current level of more than 80%. Gold is still hoarded but to a lesser extent than in the past. It is demonetised and has relatively small demand as a hedge against inflation, although some people still use it as a hedge.

Most developed economies have inflation under control and use mechanisms such as moving interest rates if inflationary pressures build up. It used to be part of the perceived wisdom that gold prices rose during times of international political turmoil. That point was referred to here three years ago when it was noted the idea had lost much of its validity, using the example of the Gulf War in 1990.

The gold price went from $US372.30 on July 31, 1990, to $US410.60 on August 17, but fell to $US388.70 at the end of September, compared with the 1990 high of $US423.75 on February 7, months before there was any hint of a conflict.

Stability in the gold price also comes, in part, from the activity of producers who usually have forward hedging structures in place, compared with an earlier system of physical delivery of metal.

Hedging procedures can have a dampening effect on price movements, as can the selling activity of central banks if they consider substantial price rises are likely to fuel inflation.

Private investors in gold would use the daily London prices only as a guide, because individuals deal in bullion (bars and wafers) and gold coins, or they may buy jewellery. Prices are different in all cases from the London "fix" prices. Every gold bar and wafer has an identification number, but otherwise one bar or wafer is indistinguishable from another.

Bullion has a gold ratio of 99.9%. The three main gold coins traded are Canadian Maple Leafs (99.9% gold ratio), kruggerrands (91.666%) and Sovereigns (91.666%). Maple Leafs are effectively pure gold and therefore free of New Zealand's GST, which does not apply to pure gold, but the other two coins are considered fine gold and therefore attract GST.

Buying gold jewellery as an investment can be tricky, because there is an intrinsic value, according to the gold content, and an aesthetic value, according to the type of object, craftsmanship and beauty. There are also differences between modern and antique jewellery, with values of the latter (apart from the gold content) varying according to the particular provenance.

Consequently, gold jewellery, unlike the three main coins, can be worth more than the basic monetary value of the gold content. Investing in gold jewellery requires some expertise in the business, as is the case with any collectable, whereas bullion and coins have the advantage of each product being the same as others in the same class.

FIX ON PRICES:

Hedging procedures can have a dampening effect on gold price movements, as can the selling activity of central banks

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