Mining Journal > Comment > Gold wars

Next month marks the fifth anniversary of the death, at the age of 74, of Ferdinand Lips, who was arguably the most respected authority of his generation on the gold market.

Born in Switzerland, Mr Lips had more than 50 years of experience in banking and finance. He was managing director of Rothschild Bank AG in Zurich, founded his own bank (Bank Lips AG) and as recently as 2000 was a founding member of Lion Capital Group.

Mr Lips served also as a non-executive director on the boards of numerous gold-mining companies, and managed the Top-Gold Fund after its inception in February 2003.

A notable advocate of the gold standard, Mr Lips’ last presentation on the subject was in August 2005 at the Gold Rush 21 conference of the Gold Anti-Trust Action Committee (GATA) in Canada (the paper was given in his absence due to ill health).

Mr Lips wrote: “Because the world has forgotten the monetary role of gold, our world is in serious trouble.

“That is the one major reason for the worrisome state of the world. The abandonment of gold as money, of the discipline of gold, is the major reason if not the only reason why our world has become a very dangerous place. In my opinion, it is the biggest tragedy in world history.”

In his third book on the subject, Gold Wars, Mr Lips outlined what he saw as official attempts to manipulate the price of gold. He is far from alone in this opinion.

Only last week, Ben Davies, the managing director of fund manager Hinde Capital (named after a ship rather than an editor), told delegates at an investor seminar in London (see page 12) “gold is the vital barometer of the health of a nation’s currency”. He added: “The suppression of gold by government allows them to mask the mismanagement of their currency.”

In his paper (available on the Mining Journal website), Mr Davies said: “The dollar’s purchasing power has been trashed in the post-war period.” He observed that “today’s system of paper money is still very young”, and warned that it depends solely on the belief that the debts, upon which it is based, will be repaid someday.

Mr Davies argues that, measured in terms of current dollars, gold is still 30% off the levels it achieved in 1980. Measured against the S&P equity index, gold would have to rise six fold to match the price of 30 years ago.

He also told delegates at the seminar that the central banks of most emerging market countries hold very little gold, and the scope for a reallocation “is huge”.

Despite the eloquence of the arguments, by both Messrs Lips and Davies, I am not convinced that there is a conspiracy to hold down the value of gold. And, even if governments and central bankers are in cahoots, it is starting to look as though they have failed. Indeed (as we note on page 5), central banks are starting to buy gold again.

In a presentation this week in Thailand, the managing director of American Precious Metals Advisors, Jeffrey Nichols, repeated his prediction that gold will reach US$1,500/oz by the middle of next year.

He added: “Not only will prices move substantially higher in the months ahead, but the uptrend still has years to go.”

Mr Nichols said gold will “eventually reach US$3,000, or even US$5,000/oz, before the gold-price cycle shifts into reverse”.

Mr Nichols gives nine factors for his bullish opinion: the inflationary monetary and fiscal policies of the US, along with a recession-like economic performance; Europe’s simmering sovereign debt crisis; continuing interest by the official sector; rising long-term saving levels, and demand for gold, from China and India; rising private-sector investment demand in the older industrialised nations (reflecting, in particular, fear of inflation and currency depreciation); the development of new gold-investment products, and of channels for its distribution; the relatively small size of the world gold market compared with other capital markets; the recent onset of global food and agricultural inflation; and the stagnant world production of gold.

Listed like this, it is easy to agree that the fundamentals are in place to extend the precious-metals bull run for at least a few more years.

Whatever the future, with the price of the metal currently at an all-time high (at least as measured in nominal US dollars), now is a good time to be debating the mechanisms at play in determining the gold price.

But do not expect easy answers – there are almost as many views as there are analysts.