An Alarm Call
Since the terrorist attacks on New York and Washington on Tuesday September 11th, the gold market has seen dramatic changes:-

Professional Speculators
Firstly many professional futures speculators closed out their short positions, and the number of long positions has increased. We believe that gold mines will be less willing to forward hedge their production because there is a real possibility of gold price levels increasing substantially.

Coins & Bars
Secondly in many different parts of the world, there has been a jump in demand for gold bars and gold coins. Many market traders are reporting ten times the normal level of business. Here in the UK has been no exception. We struggled to keep up with enquiries and demand, many of our customers found our phones solidly busy. Predictably after three weeks, the initial near-panic has calmed, but we expect demand to continue strongly, and would not be surprised to see a renewed flurry of buying when direct military action starts in the Bin Laden affair.

Price Level Changes
Even before the September 2001, typical gold price levels had firmed up since the lows of 1997 to 2000. In the first half of 2000, we found ourselves starting to notice a greater number of upward factors than downward ones, as far as gold demand and gold prices were concerned. We normally try to take a very neutral view. While we are happy to try to list the pro's and con's of the gold price future, we usually leave it to our customers to make up their own minds about its future direction. We prefer never to be in a position where any customer can complain about our erroneous advice or views. When we come out of our neutral corner, there is some strong reason for it.

The Alarm Clock
We do not believe that most of the recent strong buying of gold has been because of the events of September 11th, or their aftermath. One of our customers commented that he felt somewhat guilty about buying gold to profit from a tragedy. We feel that the terrorist attacks should be considered as an alarm, in more ways than one. When your alarm clock goes off in the morning, most of us realise it's time to get up and start the day. We don't get started because the alarm clock rang, but because it's actually time to get out of bed and get moving. We set the alarm the night before because we have already decided at what time we wish to wake up. Although nobody actually rings a bell when it's time to sell shares or buy gold, we should view the terrible events of the 11th as an alarm call, a reminder of the vulnerability of the western economy, indeed the whole world economy, of equity (share) markets, of currencies, of major businesses (Swissair for example), of world peace, and our own comfortable and prosperous lifestyles. There was already acceptance that the economy had moved into recession beforehand, much of the discussion centred on whether we had already seen the worst of it. We found it hard to believe that share prices had remained so close to their high points, and that there had not already been large drops in world stock market prices. There must now be considerable pressure on the world's banking system, and worries for the near future. Any banks which have allowed themselves to become overexposed to certain market sectors may well become overextended, and we should not be surprised to see the collapse of a number of banks, and rescue and support operations for many others. Some years ago we read a report about the Japanese property market which stated that some yields were at an unsustainable 1% level, and that the Japanese banks had lent very heavily against these inflated values. We remain surprised that there has not been a Japanese banking crisis. Now that the alarm has gone off, a few have reacted to it and made a start, but there must be many investors who have metaphorically switched it off, rolled over and gone back to sleep.

Upside & Downside
Some people ask us if gold will go up. Even after looking at the above, we can't say for certain, but we do believe that it is more likely to go up than down, and we also believe that the upside potential is far greater than the downside risk. Let's look at both. If Bin Laden and the Taliban backed down, apologised, left power to a moderate government in Afghanistan, if Palestine and Israel made up their differences permanently, if Iraq got shut of Saddam Hussein, if the USA decided it was satisfied that it had been avenged, then things might, just might, return to normal, or at least the pre-crisis level. Gold demand might ease off, and prices may fall back by about $20 or $30. Even at this, holders of gold could be happy that no disaster had befallen them. The scenario we just painted is, we must admit, unlikely. It's frightening to think of what may happen if none of the above transpires. We could be looking at World War III. Even if the conflict stays at a safe level, and does not escalate, we could see a renewed flight from currencies, equities, property (real estate), into liquid transportable solid assets such as gold. What's more there is no commodity as suitable as gold for this purpose. In this case, we would be surprised if gold did not rise by at least 20%, price of gold could easily double or treble. The last time we considered this, in about 1967, we thought it was a remote possibility, but it went on not only to do so within a few months, but to continue from $35 to $850, an increase of over 24 times. A similar increase now would mean a gold price of over $7000 or almost £5000. The thought of this is almost as frightening as that of World War III.

A Gamble?
All of life is a gamble. We would not suggest anyone should borrow to the hilt to buy physical gold or gold future contracts, but looking at the upside versus the downside, and trying to guess the probabilities of gain against loss, if we had to bet, we would be extremely reluctant to take a short position in gold, whereas the opposite has many attractions. Which way would you bet?

Or An Insurance Premium?
Rather than perceive an investment in gold at current prices as a gamble, it might be better to view it as a form of insurance, or similar to expenditure on a safe or a burglar alarm system. Any investment in gold, except at the very top of a bull market, will at worst always retain a significant proportion of its original value. Consider any loss as an insurance premium, and a gold purchase cannot be seen as a gamble, only as a prudent action, but with an inbuilt potential for enormous profit. We consider this fact with both hope and fear. We hope that world events will not be so catastrophic that gold hits the price levels we have already discussed, and we fear what the world may be like if we do witness such price levels.

October 2nd 2001