Gold is likely to hit new record highs, spurred by serious concern about the U.S. currency and doubt about the state of the world economy, the chairman of Barrick Gold Corp. said on Thursday.
There was even a possibility, although not a probability, central banks, including China's, might start to switch from dollar holdings to gold, which could cause the metal's price to treble or more.
From a gold producers' perspective, one negative is that the cost of bringing on production has remained high, even as other raw materials, including base metals and energy, have slumped.
Gold is at record levels in every currency except dollars. Even within dollar terms it is within a few percentage points of an all-time high at a time when all the other major commodities are falling, Peter Munk told Reuters at the World Economic Forum meeting in Davos.
Whether it's the currency effect or a reaction to a feeling of uncertainty, gold in my opinion is more likely to go up than down, the chairman and founder of the world's largest gold mining company said.
Spot gold was at $902.80/904.80 at 1817 GMT. It hit a record high of $1,030.80 an ounce in March last year.
Munk stressed he was merely weighing the odds.
It would be stupid to assume commodities prices can only go one way, he said, adding physical demand for gold jewellery was not high during the economic downturn.
Gold has been one of the best-performing assets of late, rising in value by nearly 17 percent since late October.
Investors have bought heavily into physical bullion in the form of coins and bars and physically-backed assets such as exchange-traded funds as a safe store of value at a time of increased volatility in other asset prices.
Munk said downward pressure on the dollar, partly because of massive U.S. spending to stimulate the economy, would increase gold's attractions as an investment further.
Gold usually moves in the opposite direction to the dollar, as it is often bought as a hedge against weakness in the U.S. currency.
My personal feeling is that with the rescue packages calling for trillions, not billions... the value of the (U.S.) currency has to go down, said Munk.
DUMB TO HEDGE
His company did not hedge its output for now -- meaning it does not use derivatives to insure against a fall in price -- and relied instead on the price climbing. In the past its successful hedging allowed it to make the acquisitions that helped to make it the world's biggest gold miner.
It would be dumb to hedge, Munk said of the current climate.
His bullishness was underscored by the possibility central banks, including that of major dollar asset-holder China, might start buying gold.
If they decide to diversify, we assume into gold, then we start to talk about a trebling or quadrupling of the gold price. It could be followed by Russia or Kuwait.
I don't think it's likely, but it's more likely. I would not have said it two years ago ...I'm not a gold bug ...but it's more likely than it was two years ago.
A strong price climate has meant ongoing investment in bringing on new gold, Munk said.
In every other mining area, people are cancelling mines.
But declines in other commodities have yet to have a major impact on cost.
Marginally yes, but substantially no. For some reason cash costs are tending to continue to increase, he said, when asked whether investment costs were falling.
Energy costs have gone down. It does help, but labour costs are consistently increasing.
The one way to reduce production costs is to invest in efficient new mines, Munk said, citing two major new projects in Nevada and the Dominican Republic and a smaller one in Tanzania.
(Reporting by Barbara Lewis, additional reporting by Jan Harvey in London; editing by Anthony Barker)
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