GOODBYE greenback hello gold? The US dollar’s dramatic slump continued yesterday. It fell to an 11-year low against sterling, tumbling 0.3 cents to $1.732, and 0.5 cents to a new $1.221 troughagainst the euro.
Against a basket of EU currencies, this is a new seven-year nadir.
At the same time, gold touched $409 an ounce, a fresh six-year high, before settling at $406.
‘The dollar is on its knees,’ says Merrill Lynch economist Andrew Roberts.
‘It has further to fall and it’s going to happen faster than people realise.’
Merrill sees the greenback falling to $1.84 against sterling, and $1.33 against the euro.
This is a long-awaited response to America’s huge balance of payments deficit currently running at 5pc of the economy and growing US government borrowing.
The dollar’s decline is bad news for UK and European manufacturers. It make their goods more expensive in the US and leaves them more vulnerable to undercutting by cheaper Asian producers. Many Asian currencies, including China’s, are pegged to the dollar and therefore decline with it.
But among the beneficiaries are euro and sterling assets and gold. If the dollar’s decline continues it will put pressure on its status as the world’s sole reserve currency.
Gold is among the potential alternatives. It has already risen 50pc in two years and fans think there is plenty more to go for. Based on long-term charts, they argue gold ‘should’ be $600 an ounce.
But forget the talk about ‘a hedge against inflation’ and ‘safe havens’.
Disregard the semi-religious babble about gold being the currency of the pharaohs with a track record stretching back thousands of years.
Gold’s latest rise has coincided with a collapse in inflation, a stock market rally and a record rise in investors’ appetite for risk. Ultimately, gold is a bet against the dollar.
This raises the question of whether it is the best bet to make. Platinum looks more attractive, thanks to shaky supplies and growing industrial and jewellery demand.
As predicted in these pages, platinum has outperformed gold this year. It jumped another $10 an ounce yesterday to $805, the highest level since the precious metals mania of 1979-80. Other metals have also risen sharply and are in greater demand. Booming Chinese industry wants copper and steel. It is not churning out golden washing machines.
Andy Smith, veteran metals analyst at Mitsui, remains a longterm- gold sceptic. He asks: ‘Is there really this lost tribe of gold buyers out there?’
Smith says silver never recovered after it was dropped by central banks 120 years ago. He notes that gold has just enjoyed a massive one-off benefit as producers stopped advanced sales and bought some back.
He prefers platinum as a longterm investment and a shortterm trade. He says: ‘If it breaks $800, there’s upside to $900.’ But he also likes palladium, platinum’s rival for car exhausts, which is looking increasingly cheap at just $200 an ounce.
Regardless of the long-term investment story, a gold rush is under way.
Speculative buying is near record levels and those telltale bubble nonsenses have begun to break out. North America’s leading ‘pot of gold’ fund trades ludicrously well above net asset value. Investors are cheerfully paying 100 for 85 in gold and silver.
Shares in major producers are also overpriced. Hedge fund manager Crispin Odey believes they have already anticipated a $480 gold price.
Bubbles can offer huge trading returns for those with strong nerves. ‘It’s always the worst shares that make you the most money,’ notes Dan Bunting, strategist at Dryden Securities.
The metal itself or selected minnows look a better bet than the major producers.
‘Don’t buy jewellery’
DOES the rise in the price of gold mean that this Christmas is the perfect time to put some jewellery in someone’s stocking?
No, says Signet, the world’s largest quoted jeweller.
Director Tim Jackson says: ‘Don’t buy jewellery as an investment. Buy it because you like the way it looks.’ The gold in a ring or necklace makes up a small part of the total cost. Much more goes in workmanship and retailing expenses.
Jackson says: ‘Fine gold only accounts for 18pc of our costs.’ Signet, which owns the H Samuel and Ernest Jones stores here and Kay Jewellers in America, is seeing no gold mania in its shops. Gold sales remain unchanged in relation to total turnover.
‘But we are seeing increasing demand for white metals silver, platinum and white gold,’ says Jackson.
‘This trend has been going for several years.’ Diamond sales are booming.
Higher gold prices put a modest pressure on margins, but the group hedges to cover its exposure.
Some gold shares might prove a good stocking filler.
West African speculator Mano UK (6p) is high risk, but has gold and diamonds worth perhaps 37p a share. Golden Prospect (351/4p) is a quasiinvestment trust of smaller prospectors, with 47p net assets.
For more conservative investors, a new fund called Gold Bullion Securities will give direct exposure to the metal itself.
Avocet Mining, tipped here in August at 391/2p, now looks overpriced at 771/2p (up 3p).
Whether a share certificate will go down as well as something sparkling on Christmas morning is another matter.
