Gold and war

Gold has always been seen as a safe haven in times of war. However, in recent years that theory hasn’t always translated into reality. For example, let’s look at the history of the first Gulf War. In July 1990, the average price for the month on the London Gold Bullion Market was $362.53. After Iraq invaded Kuwait in early August, the price took a big jump, to $394.73. But instead of continuing to move higher, as might have been expected given the escalation of war fears, the bullion price began to slip. By December, it had settled back to $381.73. It continued to drop as the war began in January 1991, and in February the price was back to almost the same level it had been the previous July. Upshot: a short, sharp jump, followed by a steady decline.

Now to the current situation. Gold has been trading recently in the US$320 range. That’s down from the high of US$327.05 that it reached in late May, before the war talk really began to heat up. So there is no sign yet that bullion is reacting in any meaningful way to the prospect of Gulf War II.

That could change, especially if the US finds itself mired in a long conflict. But based on recent history, investors wld be unwise to make a big bet on it. Bullion prices may be driven higher by other factors, and many people seem to think that’s exactly what will happen, judging by the strong advance registrations at the big US gold shows coming up in the fall. However, an Iraqi war in and of itself isn’t likely to tilt the scales.

With gold prices drifting, even major announcements by big gold producers don’t seem to be doing much for share values. Barrick Gold Corp. announced recently that it will invest US$2 billion over the next five years to develop four new mines in South America and Australia. When the work is completed, Barrick expects to be the world’s largest and most profitable gold producer. CEO Randall Oliphant says the result will be to make Barrick the industry’s only growth stock. Investors yawned and the stock barely budged following the announcement. But a week or so later, when Barrick issued a profit warning for the balance of 2002, the share price plunged.

The knock on Barrick has always been that it hedges part of its output by selling forward. That reduces the risk, but also puts a cap on the profit upside potential in the event of a big run-up in the gold price. That’s why the stock has long been seen as a dull but conservative way to maintain a position in gold. Investors apparently aren’t going to change their view until they see gold coming out of the new mines and get a fix on Barrick’s future earnings and sales policies.

Despite the lack of any war stimulus this far, if you like the prospects for bullion and don’t want to go out on too long a limb, consider buying units in the iGold Fund that trades on the TSX under the symbol XGD. These units give you exposure to a range of Canadian gold companies, in the following proportions: Barrick 25.7 per cent, Placer Dome 24.4 per cent, Goldcorp 13.4 per cent, Meridian 12.6 per cent, Agnico-Eagle 7.5 per cent, Glamis 7.3 per cent, Kinross 5.3 per cent, Bema 2.2 per cent, and Iamgold 1.6 per cent. So you have a mix of companies of varying sizes, with different sales policies and prospects.

The fund’s performance will track the S&P/TSX Canadian Gold Index, which is up abut 40 per cent so far this year. The MER of the fund is capped at 0.55 per cent, which makes it far cheaper than any precious metals mutual fund.

Note that iGold Fund units are suggested for aggressive investors only. Discuss the idea with your financial advisor before making a decision.

Adapted from an article that originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely investment advice from some of Canada’s leading experts. For membership information and to read a sample issue, go to: