Gold is a "real store of value" that tanscends the metals market, is a mirror of the inflation rate and still fascinates like no other material, Lihir Gold CEO Arthur Hood told the Melbourne Mining Club members.
Mr Hood shared the joy of a rampant gold price in Melbourne Town Hall recently.
"Okay so there we have it, gold at a 28-year high, it’s just fantastic," Mr Hood said.
"It’s a whole heap more fun running a place when the gold price is $730 bucks an ounce than when it’s 250 or 350 bucks an ounce.
"Although that sounds very high, if you take the gold price since 1970, in 2007 dollars, the average price of gold is about 580 dollars an ounce, and so at $730 you’re not that far above the average and if you go back to the peak in the early 80’s, in 2007 dollars, that’s about 1650 dollars an ounce, so we’re a long way to go before we reach the peak in real dollar terms.
"So what’s driving this? Well, we don’t have inflation in the world’s major economies but oil and gold are proxies for inflation and you can see the price is moving up for both of them.
"There’s also another, I’m not quite sure if it’s an economic fact or an old wives’ tale, but people like to talk about the ratio between the gold price and barrels of oil.
"Either, how many barrels of oil one ounce of gold will buy you or vice-versa and the historic average is 16.9 barrels of gold (sic) per ounce of gold so if we’re going to go with that historic average, you can see we’re going to head towards $1350 an ounce.
"Most people accept that there’s an inverse relationship between the US dollar and the gold price. This graph of the Euro US versus gold certainly reinforces that.
"Of course one of the other factors behind the gold price is the weakening US economic situation and you really see the disconnect between the five-year bond rate and the gold price there.
"Supply and demand: Over the last few years there’s been a gentle decline in the supply of gold that’s available around the world.
"The big four have seen a 20 per cent drop in the last seven years. That’s been substituted by the rest of the world growing production there, in particular China, in fact the big four aren’t the big four anymore because China is now the fourth-biggest gold producer in the world.
"What’s the gold price going to do? Well I’m not making any predictions but I’ll pick up a few predictions from last week’s Denver Gold Conference.
"Dr Martin Murenbeeld, who does a presentation every year, pretty accurate in his predictions, he’s giving guidance for the end of the year at $754, works for me, and an average next year of around about $823.
"He does a risk-weighted prediction and he’s looking at anywhere between a 90 per cent probability at anywhere between $790–$950 an ounce or something like that.
"GFMS, they do a similar type of thing, and they’ve given a range next year of $700-$850 dollars an ounce.
"And of course, I couldn’t go away from this without putting up the words of my fellow gold bug, Mr Pierre Lassonde. He sees gold price going through the nominal record of $850 over the next 12 months, and of course his often-quoted statement of ‘I know it’s going to have three noughts after it, I just don’t know what the number’s going to be in front.’
"So, in conclusion, our commodity is not a commodity, as the real gold bugs among you would know.
"It’s undergoing a renaissance and people recognise it’s the real store of value, and the price is rising, and who knows where it’s going to go to in the next year or so, and so on that note, I’m happy to try and avoid your questions."
"Okay so there we have it, gold at a 28-year high, it’s just fantastic," Mr Hood said.
"It’s a whole heap more fun running a place when the gold price is $730 bucks an ounce than when it’s 250 or 350 bucks an ounce.
"Although that sounds very high, if you take the gold price since 1970, in 2007 dollars, the average price of gold is about 580 dollars an ounce, and so at $730 you’re not that far above the average and if you go back to the peak in the early 80’s, in 2007 dollars, that’s about 1650 dollars an ounce, so we’re a long way to go before we reach the peak in real dollar terms.
"So what’s driving this? Well, we don’t have inflation in the world’s major economies but oil and gold are proxies for inflation and you can see the price is moving up for both of them.
"There’s also another, I’m not quite sure if it’s an economic fact or an old wives’ tale, but people like to talk about the ratio between the gold price and barrels of oil.
"Either, how many barrels of oil one ounce of gold will buy you or vice-versa and the historic average is 16.9 barrels of gold (sic) per ounce of gold so if we’re going to go with that historic average, you can see we’re going to head towards $1350 an ounce.
"Most people accept that there’s an inverse relationship between the US dollar and the gold price. This graph of the Euro US versus gold certainly reinforces that.
"Of course one of the other factors behind the gold price is the weakening US economic situation and you really see the disconnect between the five-year bond rate and the gold price there.
"Supply and demand: Over the last few years there’s been a gentle decline in the supply of gold that’s available around the world.
"The big four have seen a 20 per cent drop in the last seven years. That’s been substituted by the rest of the world growing production there, in particular China, in fact the big four aren’t the big four anymore because China is now the fourth-biggest gold producer in the world.
"What’s the gold price going to do? Well I’m not making any predictions but I’ll pick up a few predictions from last week’s Denver Gold Conference.
"Dr Martin Murenbeeld, who does a presentation every year, pretty accurate in his predictions, he’s giving guidance for the end of the year at $754, works for me, and an average next year of around about $823.
"He does a risk-weighted prediction and he’s looking at anywhere between a 90 per cent probability at anywhere between $790–$950 an ounce or something like that.
"GFMS, they do a similar type of thing, and they’ve given a range next year of $700-$850 dollars an ounce.
"And of course, I couldn’t go away from this without putting up the words of my fellow gold bug, Mr Pierre Lassonde. He sees gold price going through the nominal record of $850 over the next 12 months, and of course his often-quoted statement of ‘I know it’s going to have three noughts after it, I just don’t know what the number’s going to be in front.’
"So, in conclusion, our commodity is not a commodity, as the real gold bugs among you would know.
"It’s undergoing a renaissance and people recognise it’s the real store of value, and the price is rising, and who knows where it’s going to go to in the next year or so, and so on that note, I’m happy to try and avoid your questions."
