All that glitters is gold - if you can dig it

When the market recovers, producers of the precious metal should prove to be worth their weight. By David Potts.

When the market recovers, producers of the precious metal should prove to be worth their weight. By David Potts.

Imagine my disappointment when I learnt that Olympic gold medals aren't made of gold. I mean, why bother?

They're made mostly of silver, in case you're interested, but the whole affair did get me wondering whether the gold price might be running out of puff.

Buying bullion would have been about the best investment you could have made last year, at least if you'd bought early on, yet goldmining shares were the worst.

You can never accuse the market of predictability. It seems the higher gold goes, the less the sharemarket believes it will stay there.

But gold stocks are also being dragged down with everything else, not that they've helped their cause in a market desperate for income - or for anything, really - due to an unfortunate tendency to pay as little in dividends as possible, and preferably not at all.

The three-year rush into gold has been founded on the fear of inflation taking off, despite there being neither hide nor hair of it.

On the contrary, if you want a good fright, try deflation. That's what's keeping central banks up at night. Take the US, which has been pumping money into an economy where the official interest rate is almost zero, so it's just about giving it away.

The reason there's no inflation is that the big banks are just hoarding the money. Well, it's really the central bank crediting their balance sheets - a sort of Bpay in reverse - due to having nobody to lend it to.

Those central bank credits, by the way, can be just as quickly reversed when the time comes. Mind you, printing money devalues the US dollar, so naturally anything priced in it rises, along with other currencies. Since the price of gold rising in US dollars but falling locally cancels out, the currency shouldn't be a problem for gold stocks. Rather, it all boils down to how much they can dig up.

But they sure are helped by the fact that the price has about doubled in three years, which puts it way above the average cost of mining it.

That's why the goldminers should be among the first to take off when the market comes to its senses.

But hang on. Wouldn't a market recovery mean that confidence has broken out, in which case the panic run into gold would stop or, indeed, reverse? Surely, then, the gold price would fall.

Maybe, though the shaky state of the euro and Europe's banks suggests its price will stay elevated for years.

Don't forget the US dollar would also recover when money flowed into Wall Street and the country's interest rates rose, in which case our dollar would drop and the Australian gold price would rise.

Besides, the miners are already priced for a substantial drop in the gold price.

That's why I figure digging for gold will be better than holding it.

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