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    Gold Breaks Above $ 1 000

    We have been keeping a closer eye on the price of gold than we would usually since the collapse of Lehman Brothers nearly 1 year ago. The reason for us doing so is that gold can display some properties that not many other assets are able to.

    It is fairly common knowledge that gold exhibits a couple key characteristics and two of them are that gold can either be held as an asset or as a currency. Holders of gold as an asset would be holding this commodity on the premise that its price will increase and their return will be captured in asset price appreciation. This assumption is generally founded on a commodity cycle occurring.

    Another reason for holding gold would be for its ability to store real value. With monetary supply around the world reaching epic proportions this reason has been gaining some traction for the following reasons:
    • In uncertain times investors like to hold real assets.
    • Historically low interest rates have reduced the yield on holding cash. As commodities don’t pay out a yield, when cash rates decrease the opportunity cost of holding a non yielding asset (read gold) decreases.
    • Money supply now will result in inflation in the future if governments don’t withdraw the liquidity in time when the velocity of money increases again. High inflation periods have typically been good times to hold commodities.

    It is interesting to compare two gold charts. One is denominated in euros and the other US dollars. You will notice that the price in USD is back at similar levels that it was at in March this year, while in EUR the price is down over 10%. The shape of the two graphs is also slightly different indicating the relative strength of the currencies over this two year period. In general the USD has depreciated relative to the EUR, but there have been periods of USD strength, notably around October last year.

    Looking from another perspective, it’s interesting that the largest pure gold mining company, Barrick Gold, has announced that they will be eliminating all of their gold hedges which will be funded by a $3bn share issue. Basically a lot of gold companies have historically hedged their book (entered into contracts to deliver a fixed amount of gold at a fixed price) to reduce the volatility in their profits. A company that is increasing their hedge book is essentially expecting the price of gold to fall, while those unwinding expect the asset to rise in price.

    Management don’t always get these decisions right, but the decision by Barrick is a clear indication that they expect the gold price to continue to track higher.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-09-09, 18:13:06, by Mike Email , Leave a comment
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