Freegold Ventures Ltd (FGOVF)

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With gold futures hitting US$1,000 per ounce, more investors seeking out shiny metal

Thursday, March 13th, 2008

Brandon Sun

http://www.brandonsun.com/story.php?story_id=95725

TORONTO - With gold prices hitting US$1,000 an ounce and seemingly set to keep on rising, the shiny, eye-catching metal is attracting more and more investors seeking to reduce risk in their portfolios as the U.S. dollar sinks and oil prices soar.

Analysts say they see no end in sight to this bull market - where the prices of precious metals tend to be negatively correlated to financial assets - as oil production declines and demand increases around the world.

Camilla Sutton, a currency strategist at Scotia Capital, said Thursday "it's hard to be a gold bear right now, that's for sure."

The move in the price of gold, she said, "has been dramatic and the forecast continues to look quite bullish," given U.S. economic weakness combined with inflationary pressures and a very, very weak U.S. dollar.

While "we could well see a pare back just because the move has been so violent and fast... looking out to the end of this year we see it staying at historically elevated levels."

Nick Barisheff, portfolio manager of the Millennium Bullion Fund at Bullion Management Group Inc., says "if you invest in bullion it's probably going to stay high and go higher."

Two elements will continue to contribute to a rising gold price for the foreseeable future, he said. The first one is a rising oil price.

"Production is in decline. We hit peak oil production apparently in February 2006 ... (Meanwhile) demand is rising" in North America, China, India, Russia and Brazil.

"That situation isn't going to be corrected in any way in the foreseeable future," said Barisheff. "Even if we found a huge oil field, it would take between five and ten years to get it into production."

The rising oil price has two implications. "It's highly inflationary because oil is used in everything we do or make or eat," he said.

Secondly, "over the very long term oil and gold are somewhat correlated in that they move in similar directions. And over a very long-term average, you could look at about 15 to one in terms of pricing," said Barisheff.

"Right now gold is under that ratio at about nine to one so it's got some catching up to do relative to the oil price."

The second element that doesn't seem to have any foreseeable curtailment is the increasing money supply in most countries.

While the U.S. Fed stopped reporting M3 a couple of years ago, other people have recalculated the number and their conclusions are that M3 in the U.S. is growing by 16 per cent annualized, he said.

Barisheff also said the money supply in China is growing by 18 per cent, India by 20 per cent, Russia by 48 and the Euro zone by about 12.

"So the world is printing a lot of paper money, which then also becomes inflationary and the price of gold rises," he said.

"When you look at what's coming down the pipe it doesn't look like that's going to slow down. It looks like it's going to speed up."

Gold, which has soared to record levels in the past year, hit a new milestone Thursday, rising to US$1,000 an ounce for the first time in futures trading - a boon for investors, but a deterrent to consumers shopping for jewelry.

After topping $1,001 on the New York Mercantile Exchange, gold for April delivery fell back to settle at $993.80 an ounce on Thursday. Analysts say gold could still go higher, especially if the U.S. Federal Reserve cuts interest rates again next week as expected.

Meanwhile, crude oil prices surged to a new trading record of US$111 on the New York Mercantile Exchange Thursday, then slipped back to close up 41 cents to settle at a record $110.33 a barrel.

When it comes to investing in gold, Barisheff favours physical bullion over gold mining companies.

Mining companies, he said, are riskier than physical bullion. "When you own the metal, it's there. It can't go to zero. Mining companies often have gone to zero."

The price of precious metals tends to be negatively correlated to financial assets, "meaning that they move in opposite directions," he said.

"By having an allocation to bullion it effectively gives you the equivalent of portfolio insurance," said Barisheff.

In 1987, the equity markets declined by 30 per cent. Mining stocks declined by 60 per cent, and the price of gold was rising, he said.

Other risk factors with mining companies include rising costs for such things as fuel, equipment, maintenance, labour.

They are "also running into geopolitical issues where governments are looking at nationalizing, increasing the royality rates," he said.

But "it's not an either/or decision, like mining shares or bullion," said Barisheff.

"They're two separate different asset classes that have different risk/reward relationships and different correlations in terms of how they move up and down."

With every investor and every portfolio, he said, "they should look at what is suitable. But you need to start with a foundation in bullion and then look at, is now the right time to speculate in mining shares."