A dentist recently offered to replace a gold crown and hand it back to his patient. “It is too valuable,” he said. For thousands of years, tooth doctors have used gold as replacement gnashers. They do it less now, though. The metal, priced at close to $1,275 an ounce, is too expensive and other materials do the job just as well.
Two decades ago, almost 2 per cent of gold bought went into dentistry. Now, according to the World Gold Council, gold production has tripled since the 1970s but dentists account for less than half a per cent of the market.
The truth is gold has limited industrial use. It is a good conductor and the metal is used in minuscule amounts in computers and mobile phones. But the technology sector accounts for 6 per cent of gold demand, down from nearer 10 per cent a decade ago, while close to half of all gold bought is made into jewellery. Fair enough. It is pretty. It has cultural value. It does not tarnish or corrode and it is transportable, at least in small amounts.
More baffling, to this columnist at least, is the allure of gold and gold equities to financially savvy investors. It persists even now, despite expectations of interest rate rises.
Gold bought for investment has risen from 11.8 per cent of total demand in 1997 to 22 per cent in 2007 and 36.5 per cent in 2016, says the Gold Council. That includes investment in exchange traded funds but not direct investment in equities.
The bugs argument is that gold diversifies portfolios, hedges against inflation and holds wealth even when the world is going to hell in a handcart. When interest rates are low, physical gold — which does not yield an income — shines. That is why the gold price rose above $1,000 a decade ago and has stayed there. And if you can’t buy bullion, buy shares in miners.
That said, equities have proven to be an imperfect match for gold bars. In September Paulson, the US hedge fund manager, talked of the “dreadful returns” from the world’s 13 largest listed gold extractors. Despite lower input costs and the rising gold price, their average returns on capital are below costs of capital. With the exception of Randgold, average shareholder returns have fallen 65 per cent since 2010, said Paulson partner Marcelo Kim.
If big companies are a poor proxy for gold, the countless small explorers quoted on stock markets in London, Canada and Australia are probably worse. Take Acacia Mining, which is embroiled in a tussle over exports with the Tanzanian government and which lost its chief executive and finance director last week. Its shares have fallen from more than 500p to 174.5p in a year.
Shares in Shanta Gold, also extracting metal in Tanzania, have fallen from 12p to 3p in a year. A decade ago they were 20p.
Shares in Xtract, the Aim tiddler focused on Mozambique, are a tenth of what they were five years ago. So, too, is the equity value of Kefi Minerals, which is prospecting in Ethiopia.
Contrast that with Hummingbird Resources. Its shares are up from about 23p a year ago to 39p, having raised $70m to construct an open-pit mine in Mali.
Unusually the project was on time and within budget and will shortly start processing ore. On average projects are 20 per cent over budget and late by a quarter, hums Bert Munro, the group’s development head.
But Hummingbird is the exception. It found a largish deposit of high-grade ore in good concentration that is relatively cheap to extract. Its all-in costs are $700 an ounce.
The cash cost for mines of rival Avocet Mining in Burkina Faso range between $900 and $1,100 an ounce. Margins would therefore become “extremely tight” if there was even a modest fall in gold prices, it warned last month. A sustained fall could threaten the group’s viability. Avocet’s profitability depends on the gold price but it has no control over it, the miner peeped as plaintively as the bird for which it is named.
And yet Avocet is backed by Elliot Advisers, the activist. Professional investors, including Capital, Fidelity and hedgies Sloane Robinson and Odey Asset Management, flock to the yellow metal and bugs abound. That makes it hard to bet against gold. The only option left for sceptics such as Small Talk is to book a trip to the dentist.
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