Gold was strongest major currency in 2002

The performance of the price of gold in 2002 largely reflects the fact that the professional investor has returned to the use of gold as a risk management tool. In the 1980s and for much of the 1990s, the economic, political and financial environments were, in the main, seen as benign, and there was no assumed need in the “professional sector” for the use of gold as a hedge against risk.

Early background

The price started to improve in 1999 and 2000 on the back of strong physical regional demand and speculative short-covering. Physical regional demand stabilized the price in mid-1999 just above US$250 per oz. and then took it slowly higher; speculative short-covering developed because of stable gold prices and falling money market interest rates.

The fact that this was happening in a period of relative political and financial calm, when there was no perceived need for substantial risk management, did bring gold to the attention of some money managers and other investors in the “professional” arena. The question became: If there was no perceived need for the professional to be hedging against risk, then why was the gold price rising?

Consequently, when global economic political and financial conditions did start to deteriorate, gold had already, to some extent, made its case for fresh attention. A solid fundamental backdrop was already in place.

Recent developments

Investment in the latter part of 2002 and at the start of 2003 has been driven by geopolitical concerns, but the underlying background is more complex and reflects currency concerns, along with the desire to hedge against risks in the equity and bond markets — and notably, in the case of Argentina and Japan, risks in the banking sector.

Corporate governance problems also played a role in the first part of 2002, as a deepening mistrust of corporate reports and accounts augmented some investors’ desire to hedge against equity exposure. Gold thus reasserted itself as an alternative asset, enabling the professional investor to diversify his risk. With concerns also swirling in the markets about the destiny of the dollar, the euro and the yen, gold and the Swiss franc came into play as reserve currencies.

As a consequence, the professional investor is once again looking at gold as a hedge against risk — something many individuals in developing nations have never ceased to do. These individual investors in the Middle East, the Indian Sub-Continent and the Far East have remained loyal to gold as a safe haven, or an “ultimate investment” as a portable, anonymous form of money, and it is this sustained activity that has formed the foundation of the change in sentiment in the rest of the world.

The “retail” investor in the so-called First World is also aware of gold’s resurgence, and there has been a noticable rekindling of interest in coins and bars from this quarter as well as interest in gold in other forms from other investment pools.

Offsetting, to some extent, this fresh demand is the fact that the slowing global economy had a negative effect on purchases of gold in the jewelry sector, and the Indian monsoon meant that Indian offtake, the world’s largest, was badly hampered. This is one of the answers to the question Why didn’t the price rise further, given all the other uncertainties in the world?

One important feature of gold is that, more often than not, a reason for one man to buy it is the same reason for another man to sell it. In this case, the slowing economy hindered jewelry purchases but prompted purchases from investors concerned that stock market valuations were too high given the deteriorating outlook for earnings.

It is worth pointing out that if the price had rocketed, the integrity of the demand side would have been severely undermined and such a rally would have proved unsustainable, as well as generating considerable resale of secondary metal and damaging new demand for the longer term.

Intermittent periods of volatility in gold’s price last year generated the usual reaction from the regional buying centres — that is, in times of volatility they moved to the sidelines. What was significant, however, was that there was little resistance on the part of these purchasers to return to the market at higher price levels once conditions had stabilized, and the support lent from the physical market has thus been at steadily rising prices.

The market has therefore benefited from a solid underlying fundamental base, combined with a cocktail of influences that have led to steady investment activity from hitherto absent friends. Moves in the past few weeks have been predominantly a reflection of increasing tension in the Middle East and North Korea, and the recent rapid upward moves have choked off physical demand in the near term. As we go to press, the price is looking to consolidate between US$345 and US$355 per oz.

There is clear evidence of speculators in the market and of investors looking for value and risk management, and this is generating caution in the expectation of profit-taking. However, the panoply of uncertainties in the external environment is underpinning the tone in the market as gold is once again sought out as an insurance policy. There may be those in the market who will either wish or need to cash in their insurance; others will wish to hold on in case of rainy days.

Gold has been seen as a currency and as an investment for thousands of years. During 2002, while other, younger, sectors showed signs of fear, gold offered the sheltering arm of a reliable elder brother.

Relative performance

Over the course of the year, gold outperformed the dollar by 25%, the yen by 14%, sterling by 13%, the euro by 9% and the Swiss franc, the other major recipient of “safe haven” funds (notably from the Middle East), by 7%.

The search for alternative assets is reflected in the relative performance against the major equity markets. Over the year, gold outperformed the FTSE by 52%, the Dow by 47%, the Nikkei by 44% and the European index by 36%.

— The London-based World Gold Council is funded by many of the world’s largest gold producers. Its aim is to stimulate gold demand and provide information on the gold market.

The U.S. numbers in brief (US$ per oz.):

	2002	2001
Open	278.35	271.10
Close	342.57	276.50
change $	+64.22	+5.40
change %	+23.07	+1.99
High London PM fix	(Dec. 27)	349.30	293.25
Low London PM fix	(Jan. 4)	277.75	255.95
Volatility ((H-L)/L)	25.90%	14.6%
Avg. PM fix	310.07	271.04