The South African equity market is set to perform in 2003 as safe haven flows to gold can send the price “sky high”, said Gad Ariovich, Economist at Anglorand Securities, at an investment seminar on Tuesday.
“One of the things that one must bear in mind is that the gold market is a tiny investment market in global terms. This means that if a small number of investors decide that they will move a small proportion into an historical safe haven, then this could send the price sky high,” Ariovich said.
The gold price has gained more than 25% since it traded below $300 an ounce in August 2002 to current prices of around $373/oz.
“Iraq is not the only reason why investors are flocking into gold. In addition to war jitters we have an erosion of trust in the US dollar, as well as worries about the Japanese banking system and what that might do to other financial systems,” Ariovich said.
The US Office of the Comptroller of the Currency (OCC) Derivatives Report showed that total US commercial bank derivative positions increased by $3,1-trillion in the third quarter 2002 to $53,2-trillion.
If a mere 2% — the historical norm — of these deals go sour and a creditor is unable to pay on demand, then the resultant $1-trillion loss would wipe out the capital of most US banks.
This risk is not negligible given that eight of America’s 12 largest corporate bankruptcies have taken place since the beginning of December 2001.
In August 1998, US Federal Reserve chairman Alan Greenspan cajoled US commercial banks into supporting the highly leveraged hedge fund, Long Term Capital Management (LTCM), so that its derivative exposure could be unwound in an orderly manner.
Greenspan said at the end of 2002 when commenting on asset bubbles that: “History indicates that bubbles tend to deflate, not gradually and linearly, but suddenly, unpredictably, and often violently.”
“Apart from the higher gold price, South African equities should also gain from the attractive valuations, which are low both in the historical South African context and by comparison with most other equity markets,” Ariovich said.
“The government has got its house in order on the policy front with regard to fiscal and monetary policy and South Africa is about to reap the benefits of the past few years of discipline,” Ariovich said. – I-Net Bridge