Gold is back - 25 years after it peaked

About 20 years ago the US dollar suffered a massive fall, which swept away Lm88 million of Malta's reserves. The very next day Malta's reserves were re-organised to mask this tragedy.

Government carried out a perfectly legal operation, which revalued Malta's gold reserves according to the market price prevalent at the time.

A few years before that date, that is almost 25 years ago, gold had hit its all-time high of $850 an ounce, and people were storming the jewellery shops at Hatton Garden trying to realise family heirlooms in hard currency.

Malta's gold revaluation story, which is widely known by all those who care for the money of their country, is yet another illustration of how gold can come to the rescue of investors to save them from difficulty, and sometimes from disaster.

Malta had to keep gold as part of its international reserves as a requirement of the International Monetary Fund. This proved to be a great godsend in the mid-Eighties. Malta's investment in gold was the most lucrative investment the Central Bank was made to perform by the IMF and the one which proved to be the most useful in a highly embarrassing situation. Malta bought gold at $32 an ounce in the Sixties and revalued it in the mid-Eighties at a multiple of that price.

Does Malta's dramatic Central Bank experience with gold carry any significance for the small Maltese investor? It certainly does. It is an experience which can easily be translated into the organisation of any portfolio, however small it may be.

An investor would be foolhardy not to include one or two per cent of precious metals into his portfolio. Such a percentage, however, fluctuates with the character of one's particular situation, and it is a matter which every investor must discuss with his stockbroker.

What is being pointed out in this instance is that gold has always been regarded as the best safeguard against disaster, and Malta is a country over which the scythe of the angel of death has hovered more than once, whether through wars or close encounters with natural disasters.

Why gold is back

The big reason why gold is back after 25 years is not because people are afraid that what happened in the Indian Ocean could very well happen under their very houses.

The reason is back is because American President George W. Bush is carrying out a war in Iraq and he could very possibly carry out another in Iran. There is also the American twin deficit, the sinking dollar could put the world into a skid, as David Smith of the London Sunday Times said in a recent article. He was talking straight from the Davos Meeting of Microsoft where Bill Gates and Warren Buffett, the greatest investors in America, made strong statements against the dollar's decline.

Gates called the dollar decline "scary" while Buffett said he would be betting against the dollar. The dollar and gold have over recent years acted like the opposite ends of a see-saw.

When gold falls, the dollar rises, and vice-versa. The dollar situation has been expressed best by Time magazine last December 20 in terms of hard statistics. It stated that foreigners hold nearly $2 billion of US Treasury securities, keeping government costs low enough to allow Bush to consider his new initiatives.

But foreigners may be reaching their saturation point when it comes to funding the US's profligate lifestyle. That nation sucks up 80 per cent of the world's available savings. If the dollar loses its cachet, foreigners will demand higher interest rates, which, if they rise fast, or far enough, could topple the economy!

The British economy

The American economy might seem to be far away to Maltese moneymen but the fate of sterling is for them a matter of daily concern. The Maltese have always had an inordinate faith in sterling, and it is high time they start to study the benefits stemming from investment in other currency areas, such as that offered by the marvellously expanding Chinese economy.

Any currency must be studied in relation to the economy, which underpins it. Economic fundamentals are more important than currency movements in the long run, but in the long run we are all dead, as the father of modern economics, John Maynard Keynes, said.

We have been talking a lot about a declining dollar, but it would be utterly unreasonable to forget that America is the most technologically advanced country in the world, which makes its economy one of the most productive. The truth is that the US has such a strong economy, and so much internal consumption, that for it money is a veil - that is, a matter of minor importance.

This is not the case with Malta, which is an open economy with a disproportionate percentage of foreign trade taken up in its GNP (gross national product). Malta must pay great attention to its currency, unlike the US.

Malta's economy can be hit by a collapsing dollar through that currency's negative impact on the British economy.

The prosperity of the UK has been reaching Malta through a healthy tourist flow, and that flow can be seriously disrupted if a sinking dollar would throw sterling on the skids. Britain has racked up 50 quarters of growth. This position was best summarised by David Smith, who stated:

"The question was anticipated in a speech last week by Kate Barker of the Bank of England's monetary policy committee. She has become the MPC's resident expert on housing, having produced a report for the Treasury on the supply of new houses. But she believes that the dollar represents a bigger risk to Britain's economic stability than events in the housing market."

The reason is because Britain, like Malta and unlike the US, is a very open economy and for it currency stability means a lot. I may add that if the world is not facing as yet a full-blown mutually destructive devaluation beggar-thy-neighbour policy, the danger of such a policy is on the horizon. This is shown by the recent dramatic rise in the price of gold.

Smith in his article couples the Barker stand with the utterances in Davos on the future of the dollar. He states: "The extraordinary run of economic growth in Britain, confirmed with last week's release of figures showing a 0.7% rise on gross domestic product in the last quarter of last year, could in other words be blown away not by home-grown problems but by a dollar crisis. The Bank, to a certain extent, could say this. But figures from Nationwide last week, showing a small rise in house prices this month, supported Barker's argument. And there has been plenty of backing for the dollar crisis risk at the Davos world economic forum."

The rise of gold

There was a strong connection between the astronomical rise of gold 25 years ago and the peaking of oil prices in 1979. The Arab sheikhs were buying gold with the extra dollars they were getting for their oil, and now with the price of oil at a high level they are doing very much the same thing.

Is it advisable to speculate on the price of gold and silver? Speculation is hardly advisable for the very rich man; just imagine what it is for someone's hard-earned life savings and for widows and orphans.

The last time gold peaked some awesome stories unfolded. Gold carried along on its bandwagon, and provided the background scenario to the attempt by the American speculator Bunker Hunt and his family to corner the world's supply of silver.

The Hunts were redoubtable financial speculators. They had struck oil in Libya when all the world's international oil companies had given up all hope of finding any. But when their attention was turned to the precious metals their luck ran out.

Their action on the world's silver markets put up the price of silver to $50 an ounce. This was a companion price to the gold price reaching $850.

The gold price at present is around $425 an ounce. It is still a long way off from the old peak, but it has risen 48.6% over the past five years. This is to be compared with a fall of 24.9% in the FSTE100 index.

Last November gold hit a 16-year high of $453. Many analysts expect the price to climb further and many investors are asking if it is a good time to buy.

The World Gold Council (WGC) has carried out a survey among analysts and found that 60 per cent of them expect gold to go over $450 at the end of the year, though none is predicting the price of $850 of 25 years ago.

There is hardly any hope of another Bunker Hunt appearing fresh with the spoils of Libyan oil, mad with the glitter of silver in his eyes.

A perplexing time

This is indeed a perplexing time for the investor, and not only the investor in gold and the dollar. The investment situation changes by the hour, if not by the day and week. The time has come for a proper definition of the role of financial consultancy within the European Union, and in this archipelago.

The EU is indeed rising to the occasion and it will be issuing a directive by next year that banks cannot conduct financial consultancy. The reason is obvious. In matters of financial consultancy, banks have a conflict of interest.

Banks, according to the coming EU rules, will be obliged to carry out a transaction at the bidding of a client, but it will not be their function to advise on the soundness or otherwise of the transaction. Nobody will be there to guide the perplexed investor but the independent financial consultant operating according to the laws of Malta, and now that Malta is part of the EU, according to the spirit and letter of the EU directive.

The greatest safeguard of the investor is however not his independent financial consultant but his financial and economic education. It Malta's money is to be protected, there should be a further development of the island's financial press on the lines of the British and American models.

Many in Malta have more than a smattering of French and Italian economic articles appearing in Il Sole 24 Ore and Le Monde, which are by no means useless. People are now smoking less, so they will have more money for those newspapers, which can make them rich; than for the cigarettes which on an average shorten their lives by eight years.

National habits

The Malta Stock Exchange, which contains a company such as Maltacom with marvellous financial ratios, is not yet a part of the national habits of Malta. The acquisition of heavy gold jewellery is much more a part of our life.

Nobody whose grandparents bought heavy gold jewellery has any reason to be sorry about that acquisition, but Maltese habits on investment in real estate die hard, enough to invite on us a degree of ironic comment.

This happened when the London Sunday Times interviewed lateral thinker Edward de Bono on his investment habits. He stated that he avoided the stock exchange and preferred property, leading the newspaper to make the ironic comment: "Guru sinks his money into Venice".

National habits die hard. It will be a long time before there is a Malta-born Maltese who will venture into the currency markets, and make dollars out of a declining dollar. Our home education prevents us from venturing into currency speculation, even those of us who have achieved world fame.

Matters are not the same for those Maltese who were born outside Malta and made their fortune in finance. A new financial destiny beckons to the youth of Malta, but the way is through intensive financial education.

John Azzopardi Vella has advised S&P and promoted the Malta Development Fund.