SATURDAY, OCTOBER 9, 2010
A Golden Era for the Yellow Metal
By GENE EPSTEIN
A bull market during today's economic uncertainty suggests gold will keep rising in coming years, although at a slower pace than in recent times. Prices could average $1,500 an ounce by 2015.
WHITHER THE GOLD PRICE? That all depends on another question: Whither the global economy? If "to hell in a handbasket" is your answer, then go for the gold: A price of $2,000 an ounce or more, versus the current $1,345.90, looks quite plausible under those circumstances.
The Barron's outlook, by contrast, might disappoint the most fervent bulls. Assuming that panic about the global economy will begin to subside to mere gut-level fear of the chronic sort, the bull market in gold that began in 2005 will slow its pace in the next few years. By 2015, the average annual price of gold could be $1,500 an ounce, albeit with plenty of fluctuations around that average.
Gold settled Friday at $1,345.90
Gold bulls, including gold-fund manager John Paulson, foresee much higher prices for the yellow metal. Their main argument is that there no longer is a haven among the major currencies. If the dollar is about to fall, that wouldn't be a worry so long as it could be replaced by, say, the euro or the yen. Gold, then, is the only haven left.
Barron's respects that argument but sees potential breaks in the price if it gets too high. At $2,000 an ounce, for example, jewelry could be sold for its gold content—selling that has already begun to happen and could accelerate greatly if the gold price climbs.
From current levels, gold is probably best seen as an insurance policy against persistent uncertainty about the global economy. While there is no gold standard, so to speak, for the share of a portfolio that should be allocated to the metal, 10% might be prudent, as Barron's Roundtable member Felix Zulauf of Zulauf Asset Management has suggested (see "Why You Need to Own Gold," Sept. 20 http://online.barrons.com/article/SB50001424052970204914704575489840556890202.html#articleTabs_panel_article%3D1 ).
Another way to play a continued rise in bullion prices is to buy gold-mining shares. According to Jeffrey Christian, managing director of the metals-consulting firm CPM Group, the full cost of mining averages $580 an ounce across all mines. If the price really has stabilized at more than $1,000, the recoverable profit could be, well, quite a gold mine.
There are wide spreads around that $580 average, with some firms bringing in the metal for a lot less than $580. So Christian cautions that not all gold mines should be treated equally. Stocks worthy of exploration include Agnico-Eagle (ticker: AEM), and Anatolia (ANO.Canada); Barrick (ABX), Fresnillo (FRES.U.K.), Goldcorp (GG) and Great Basin Gold (GBG).
According to CPM Group, if gold were bought only for its industrial and ornamental uses, its price would run about $600 today. The main driver of the bull market has been net buying by investors, due partly to the advent of exchange-traded funds that make it easy to acquire the metal. Investors have been net sellers of gold in just three of the past 40 years, in each case on a small scale.
Central banks shifted from being fairly consistent net sellers of gold to net buyers in 2009, a trend that is likely to continue. Mature economies seem to be satisfied with the amount of gold they own, and have withdrawn from selling. Countries that run trade surpluses, including China, India and Russia, have been putting some of that surplus into gold.
THE LAST MAJOR BULL MARKET IN GOLD occurred in the 1970s and early '80s, when the economy also seemed out of control as inflation grew by double digits and interest rates rose above 20%. Gold then fell back with the onset of the Great Moderation—the long period that followed of moderate volatility in the economy, with confidence more or less restored. Since 2005, a very different kind of uncertainty has arisen, fueling a bull market in gold that has so far looked even more durable than the previous one.
The gold price has reached a fairly solid plateau. Price spikes to $2,000 an ounce are more likely now than declines to $700, which would be a big gift to buyers. If there is a golden mean of gold bullishness, however, look for prices to keep rising, although not as fast as in the past few years.
Second Bull Run
The last bull market in gold was fueled by the economic turmoil and uncertainty of the 1970s and early '80s. Through the long period of the Great Moderation that followed—when the ups and downs of the economy had greatly moderated—the gold price stayed in a broad trading range. The gold bull market that began in 2005 has been propelled by turmoil and uncertainty that is likely to persist. Accordingly, the long rally could continue for another five years, although at a slower pace than in the previous five.
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