Gold soars as investors play safe in perilous times

OnWall Street: WFive hundred years ago Sir Thomas Moore expressed the wonderment "that gold, which in itself is so useless a thing, should be everywhere so much esteemed", writes Conor O'Clery

Gold has few industrial uses but everywhere it is still esteemed in this modern age - by those who wear gold watches and chains but even more so by central bankers.

Bank vaults all over the world are stacked high with gold bars the size of building bricks, which taken together account for one-third of all the gold ever mined. Fort Knox in Kentucky holds most of the United States's 8,149 tonnes of gold in vaults lined with granite, steel and concrete, accounting for 60 per cent of the country's reserves.

Only Germany comes close with 3,448 tonnes, followed by the International Monetary Fund with 3,217 tonnes stashed away to underwrite its loans.

The Republic's Central Bank has a mere 5.5 tonnes in its vaults, about 1 per cent of the national reserves and only slightly more than that held by Nepal or Albania.

The esteem for gold has, however, waned on the world's financial markets over the past two decades.

In the late 1970s gold traded at more than $800 an ounce but in recent years - with the markets booming, the dollar almighty and international tension at a low ebb - it tumbled to $300 an ounce.

Who wanted to spend money investing in metals when a dotcom share was the true alchemy, turning paper into piles of dollar bills in as long as it took for a bubble to rise?

After being beaten down for years, the precious metal is now staging a comeback. It has risen 15 per cent in value since the start of the year and sells at $323 a troy ounce, and is still rising.

Many gold comebacks have fizzled since the 1970s but this rally could be different. Gold glistens most brightly in perilous times. The world is a more uncertain place since the economic slowdown and the September 11th attacks. More terrorist attacks are threatened; there are persistent tensions in the Middle East, and between nuclear-armed India and Pakistan; world markets are in a slump; the dollar is sliding; corporate scandals have undermined equity prices; and the outlook for the US economy remains uncertain.

IT IS no coincidence that as the Dow Jones Industrial Average index started to go south, gold went north. With investors looking for stability and safe havens, mutual funds that are invested in gold, which weighed down portfolios for two decades, have surged more than 70 per cent in the past five months.

Gabelli Gold Fund, which invests in gold company stocks, has grown from $30 million to $100 million since the end of last year.

Shares in gold-mining companies have soared: Gold Fields by 160 per cent, AngloGold by 80 per cent and Ashanti Goldfields by 40 per cent (though some analysts warn that these share prices are over-inflated).

Outstanding contracts in gold futures at the New York Mercantile Exchange have risen 55 per cent or six million troy ounces in the past six months.

Analysts say that the price of gold will continue moving up to around $340-$350 an ounce over the next month, as the asset market remains weak and volatile.

With no prospect of an end to the war on terrorism or a quick economic rebound, the price should continue to feed on uncertainty.

Central banks might yield to temptation and start to sell some of their gold to take advantage of the higher price, which would depress the price considerably, although, under the 1999 Gold Agreement, total world sales may not exceed 400 tonnes in any one year.

On the other hand, countries such as China, which liked to have most of its reserves in US dollars, is looking to increase the amount it holds in gold, currently only 2 per cent of its reserves.

The yellow stuff, they seem to believe, is more likely to hold its value these days than the greenback.