Erratic gold offers few clues
ALLAN ROBINSON
June 26, 2008
Swings in gold bullion during the past few weeks have been erratic, to say the least, as traders attempt to divine the course of the U.S. dollar and inflation; but investors should look at gold as just another commodity facing supply constraints, said John Ing, the president of Maison Placements Canada Inc.
"Really the market is so myopic trying to read the tea leaves," Mr. Ing said.
During June there have been daily swings up and down from $10 (U.S.) to $25 with gold falling $14.60 an ounce to $874.60 late yesterday morning before closing at $882.30.
WHAT ARE THE EXPECTATIONS?
In the short run, higher U.S. interest rates will help the greenback and hurt gold, but inflation pressures in the form of rising prices of oil, food and other commodities will continue because of growing demand, a shortage of supply and continuing stimulative fiscal and monetary policies south of the border, Mr. Ing said. "Any dollar strength will prove to be temporary," he said.
Although the price of bullion recently reached record levels, it has lagged other commodities. There have been few gold discoveries, while mine development costs have soared, resulting in poor stock market performance for the gold mining companies. "Energy costs make up one-third of the cost of gold production," Mr. Ing said. As a result, gold prices need to go higher to help justify the huge capital expenditures needed to develop new mines, he said.
Among the larger companies Mr. Ing likes with new mines under development are Agnico-Eagle Mines Ltd. and Kinross Gold Corp., while his junior favourites are Aurizon Mines Ltd. and Eldorado Gold Corp.
"Everybody calls prices going up 'inflation,' but a lot of the prices going up are not inflation but are supply and demand signals," said Martin Murenbeeld, chief economist at Dundee Wealth Management Ltd. "The U.S. Federal Reserve Board has essentially zero control over food and energy prices," he said. "They can just jawbone and hope food and energy doesn't work itself through the labour force wage structure."
And U.S. inflation is not the major problem. The countries with the most rampant inflation with poor monetary policies are Russia, China and some in the Middle East, which are not allowing their currencies to rise against the U.S. dollar, Mr. Murenbeeld said.