13 Oct 1999 (for West Australian Mining Chronicle)

GOLDEN DAYS FOR PRODUCERS

AND SHAREHOLDERS

by Brian Jenkins

The excitement of gold's stunning rebirth in world markets has been accompanied by the onset of equally dramatic takeover activity, notably AngloGold's premium all-scrip bid for Acacia Resources. The South African giant operates four of the world's top ten goldmines, producing 295 tons last year, or about 12 per cent of the world total.

While the battle for Acacia is on between Anglo and Delta Gold, there have been predictions of further twists, including a possible takeover bid for Delta. Targeted shareholders cannot lose while the market is at its present high.

Confidence in the immediate future of gold was boosted by the dramatic 35 per cent rise to a peak of over $US340 an ounce, fuelled by a rush of hedge funds to cover short forward orders. These commitments seem likely to sustain some stability for up to a year at a floor of over $US300 - a bonanza for most Australian producers.

Despite the euphoria, few analysts believe gold's ascendancy will continue longer than a year. The trend to quitting reserve bank holdings, though temporarily slowed in Europe, is bound to resume before long, for large gold holdings are a recognised liability in terms of forgone investment returns. Producers are therefore well advised to continue with prudent hedging and diversification.

For 20 years after the United States abandoned the gold standard in 1971, gold was retained as a reserve asset by most official holders. The picture changed in the 1990s when sales by Canada were followed by other countries, including Argentina, Australia, Belgium, the Czech Republic, and the Netherlands. The most recent big sale of official gold was by the UK in July 1999. Removal of the Swiss franc from the gold standard was expected to result in sale of over half of the national reserve or 1,300 tons (about 42 million fine ounces) of gold.

For over a year, the IMF canvassed the proposal to sell a sizable fraction of its $30US billion holding, the rationale being to apply the proceeds to debt reduction in third-world countries. The prospect had a depressing effect on the market, though it was always unlikely to achieve the mandatory Congress and 85% board voting support.

Equally unlikely is a publicised claim that an IMF sale was blocked by a global lobbying campaign based on saving mining jobs in South Africa and developing countries. The IMF is bound by its rules to consider the impact of sales on the world market. It is also obligated to favour measures which protect Fund income, bearing in mind that the static gold has represented billions of dollars worth of forgone investment income. The favoured method seems to be a sale-and-buy-back arrangement with debtor nations, resulting in mutual benefit and a profitable revaluation.

The decision of 15 European countries, on 24 September, to cap their combined gold sales at 400 tons p.a. or 2,000 tons over a five-year period started the recent buying frenzy but is by no means certain to be fulfilled as market conditions change.

It seems that the short covering by hedge funds is nearing completion. With the cooling of that activity, the market should settle down and the gold price revert to a reduced but stable level. The indicator to watch may be the lease rate which, at 2 per cent or less, was providing producers with a convenient buffer - but is causing a painful shake out for some. Those who reinvest the proceeds of borrowed gold in equities must withdraw if the lease rate goes over 7 per cent, swallowing their margin.

Producers with bullion to spare have been having a field day selling at prices around $A500 an ounce and laying in profit before the arrival of a natural correction.

Further downward movement in the value of the US dollar is a highly possible scenario in which the gold price could be expected to hold up. American agricultural exports to Europe have hit a rough patch over rejection of hormone-treated beef and the new genetically modified crops in which there was heavy investment. Even if pressure for a rise in interest rates is resisted, the long-forecast stockmarket downturn could show up in the next few months. In the absence of any strong alternative currency, gold would hold considerable attraction.