Shortage points gold to US$500
DESPITE gold's surge this week to a six-year high, one of its biggest promoters says production shortfalls will continue to push it even higher, towards US$500 an ounce.
Trading on New York's Comex exchange on Thursday pushed gold through US$405 an ounce, and Julian Baring, a director of Mercury Asset Management, said more gains were expected.
Mercury Asset Management, a leading independent pension fund manager in Britain, bought the James Capel Gold and General Fund in 1991, and now runs it as the Mercury Gold and General Fund.
Mr Baring, who has long extolled gold and shares in gold companies, said there had been significant shortfalls in gold supply, partly because of forward-selling to central banks by mining companies.
Miners last year sold 500 tonnes they had yet to produce, causing pressures on supply.
Demand for gold already exceeded newly mined supply by 700 tonnes annually, it was cheap to go long on gold, and large short positions already existed in the market, Mr Baring said.
One reason for gold shares' excellent performance was their relative scarcity, with a total capitalisation worldwide of about US$64 billion, about the same size as two of the largest European companies combined.
While South African miners' profitability had been under pressure, radical changes meant that South African gold companies would move towards operating procedures regarded as standard elsewhere.
This should lead to major improvements in productivity and should bring a positive re-rating of South African gold shares.
The gold price remained low in most major currencies, Mr Baring said.
Gold was 18 per cent below its long-term purchasing power and a long trend of underperforming the market was about to end.
'We think there's a very reasonable chance that you will see gold at US$500 [an ounce] in the next three years,' Mr Baring said.
In the space of one year, 10 shares in goldminers' in which the fund had invested had gone up 10-fold, and a wider investor base was going to boost gold in the years to come, he said.
The fund has 83 per cent of its investments in gold, with 2 per cent in cash and the rest in base metals.
He believes long-term trends indicate gold is undervalued and should stand at about US$407 an ounce.
Mr Baring has held a long-term bullish view on gold. In 1993, he said an upturn in the gold price was not a flash in the pan but the start of an extended bull-run on a similar scale to the big surge of the 1980s.
The fund is US dollar-denominated and Jersey-domiciled. Mercury set up its first gold fund in 1988, the Mercury Gold and General Fund, which has achieved a return since launch of more than 280 per cent.
However, gold investments should not be more than 2.5 per cent to 5 per cent of a portfolio, said Mr Baring, who has been involved in the mining industry for 40 years.
Gold offered good returns, but was not without risk.
'It's very volatile. It's very dangerous. And it's just starting,' he said.
