The good news is that the gold market continues to consolidate above $600/oz building the sort of base from which it would be reasonable to expect a test of the recent high of $730/oz.
The one interesting piece of news that was published in the Daily Telegraph Business Section is that Australia’s biggest gold miner, Newcrest Mining, acknowledges that gold will possibly surge to $1,000/oz. Because of this, they are to sharply curtail their practice of locking-in future gold sales. Their hedging policy has left Newcrest on the sidelines through much of the five-year gold boom to date. Ian Smith, Chief Executive, recently said that they were determined to rid the monkey on its back “it would be nice if we didn’t have a hedge book” he said. When a gold mining company closes its hedge book it buys back the forward sales, which is very positive for the gold price.
At RHAM we have little doubt that the bull market for gold still has a lot to do. Share prices of unhedged gold miners will benefit tremendously. Those investments held in RHAM managed portfolios are predominantly in those types of investments.
The ratio calculated by dividing into the gold price the price of the Philadelphia Gold and Silver Index is at 4.33, near to 5, the upper extreme of the ratio which tends to fluctuate between 5 and 3. At 5, gold mining shares are at their least expensive relative to the price of gold. We could well be at the start of another of those moves towards 3, which would see a significant out-performance of gold mining shares. Last time this happened was for the year ending May 2006 when MLG&G went from bid price 380p to 892p.
The oil price remains securely above $70/barrel and there is no let-up in demand so any type of supply interruption is very positive for the price. The latest such news is BP’s announcement that their Prudhoe oil field in Northern Alaska needs to be closed down because of severe corrosion and a small spill. It provides 8% of US domestic demand, equivalent to one third of the oil the US imports from Venezuela. A temporary loss of this resource is a big deal. We are in the hurricane season – about that, so far so good.
As with gold bullion, the bull market for oil is belligerently strong and continues to provide one of the most outstanding investment opportunities.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
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