Price of gold soars as investors seek safe haven

Prices for gold have been hovering around all-time highs at $1,700 an ounce for most of the year and many are predicting that prices could hit $2,000 in 2013. Economic problems in the US and Europe have been driving this market as many investors look towards a safe haven investment amid turmoil.

By Kathryn Diss
September 21, 2012
ABC News

For years iron ore has been front and centre of Western Australia's mining boom but in lacklustre economic times, gold is stealing the limelight and it's giving junior miners the chance to leapfrog into the industry.

Prices for the precious metal have been hovering around all time highs of $1700 US an ounce for most of the year and the punters are predicting the price will hit the $2000 mark in 2013.

It's a prediction which has Western Australia's junior gold miners excited.

WA explorer, Phoenix Gold, is based in Kalgoorlie.

Its managing director Jon Price says the high price allows the company to transition from explorer to producer.

"We now have a lot of opportunity to transition into a producer much earlier than we would have been able to if prices were much lower than what they are," he said.

"We also have the ability to self fund the move, rather than bringing in a larger company to back us."

So, what's driving the market?

Economic problems in the United States and Europe are driving gold's steady climb as prices for traditional bulk commodities such as iron ore and nickel remain volatile amid concerns global growth is slowing.

Financial advisor, Jordan Eliseo says the economic stimulus measures being implemented by the two continents coupled with near zero interest rates make the shiny metal a safe investment option against further market volatility.

"Gold is different to other commodities," he said.

"It's seen as a monetary asset rather than a commodity itself. Commodities in general are consumables; for instance iron ore is turned into steel, while wheat is turned into a bread roll.

"Particularly in times like these when demand for consumables is low, gold plays an important role because it is stored and it's stored because it's a store of wealth."

Increased activity

While Phoenix Gold says its plans to launch into production are buoyed by the gold price, there's strong belief in the industry it will remain high for an extended period and support the development or emergence of newcomers into the market.

Mr Price says it's been tough for small miners to come online for some time.

"It's been difficult for juniors and mid tier producers," he said.

"We haven't got a large amount of companies in the mid-tier space and having further taxes and difficulties in getting approvals certainly hasn't added any benefit to it.

"Seeing the gold price climb, people are starting to invest a little bit more than they have in the past and that's great for the junior gold sector."

Fellow goldfields miner, Focus Minerals says the high and sustained price of gold should encourage the exploration of greenfields areas.

The company's Campbell Baird says increasing activity within the greenfields sector is vitally important.

"Gold was first discovered in Coolgardie in 1896," he said.

"Here we are over a hundred years later, still mining within four or five kilometres of the town.

"There's still an extraordinary amount of gold to be found and mined in WA and that small explorer space is where is gets found, so it's absolutely critical these guys are supported while prices are high."

Resource analyst with Paterson's Securities Alex Passmore says as operating costs in Western Australia continue to increase, any boost in the metal's price will help miners enter the sector.

"The average cost of mining in WA's gold sector has gone up to around $800 an ounce," he said. "That's up significantly from $350 just a few years ago and that's just with cost increases, let alone the high Aussie dollar.

"However, with gold prices sitting at $1800 US an ounce, it's still a good margin, so you would expect to see an expansion in mining activity because of that."

Mergers and takeovers

Analysts say mergers and take-over bids are likely to become more common because gold miners remain undervalued compared to the high price of the metal.

"Merger and acquisition activity in the sector should be on the rise as there is a large gap between the value of gold companies and the gold price, while the gold price has rallied, equities really haven't, Mr Passmore said."

This topic was a key talking point at the annual Diggers and Dealers conference in Kalgoorlie a few weeks ago and was kicked started by the marriage of fellow goldfields miners, Integral Mining and Silverlake Resources.

More recently, two other goldfields miners have also entered the same space, signing deals with some of China's largest gold producers.

Norton Gold Fields has accepted a take-over bid Jinyu Mining Limited, while Focus Minerals has joined forces with Shandong Gold, allowing the Chinese miner to increase its stake in the company to more than 50 per cent.

Campbell Baird says partnering with one of China's three largest gold miners makes sense for the company.

"This allows us to leapfrog into our investments in Coolgardie and Laverton, it allows us to absolutely accelerate while the price of gold is high.

"Mining in W-A is extremely capital expensive and we all know we need capital to grow our business, that's coming from China right now and that's fantastic for WA because it's allowing us to build great assets and great infrastructure."

Mr Passmore says while he believes the current economic climate will support movement within the space, companies will only look at merging if it makes good technical and economic sense.

Reserve currency

In tough economic times and with uncertainty surrounding the future value of key bulk commodities, many countries are stockpiling gold in order to build up a reserve currency.

Mr Passmore says the Chinese government is one of those diversifying its economy to remain robust.

"China has historically been focused on bulk commodities and industrial related metals but with a huge US-dollar reserve, the country is now converting some of that into gold, as in physical gold plus gold assets which are a hedge against further depreciation in the US dollar," he said.

"Investment in gold will remain the major driver of prices in 2013 as gold becomes more of currency and less of a commodity."

It's a move Mr Eliseo says many smaller investors and retirees are also making.

"They ask where can I save and where can I store my wealth," he said.

"They're quite worried about the stock market because that's still quite volatile and then they ask 'how safe are my dollars in a bank if interest rates are low and more money is being printed in countries such as the US, Europe and Japan?'.

"This is the time to invest in gold.

"When people can go to a bank and get a real rate of return from their investment then gold will become less attractive but we're clearly not at that point because banks are making monetary policy easier by printing more money."

Bullion dealer, ABC Bullion says growth in sales has been huge this year.

The company's Janie Simpson says she expects that growth to continue as people diversify their wealth into a safer commodity.

"We're seeing an exponential increase in sales again," she said.

"Often when the price spikes it sets people off thinking and we're selling unprecedented amounts of the precious metal.

"We turned over $1.5 billion in bullion sales last year and I think that's only going to increase this year as people start including physical metals in their investment portfolio."

But for now, all those involved in the industry are hoping the punters are right about investing in gold.

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