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Gold a victim of its own success, Munk argues

November 3, 2008 at 10:00 by Mario

The global financial meltdown should have settled the long-standing debate between gold bugs who consider bullion the ultimate store of value and those who think the yellow metal is merely another commodity.
Instead, it’s proven both camps wrong, at least so far, according to Peter Munk, the founder and chairman of the world’s largest gold miner, Barrick Gold Corp.
“Unfortunately, the problem is that gold falls between those two things,” Mr. Munk said in an interview yesterday after Toronto-based Barrick reported a 26- per-cent drop in third-quarter profit to $254-million and reiterated its production and cost guidance for the year.
If ever there was a time for gold to shine, it should have come with the collapse of Lehman Brothers and other financial institutions worldwide.
Gold soared during the market crash of 1987 and in the months following the Sept. 11, 2001, terrorist attacks.
Yet during the biggest financial crisis since the Great Depression, bullion has tumbled from its all-time high of $1,032 (U.S.) in March, to less than $700 an ounce last week.
“The unprecedented storm we have just gone through is the ideal condition that gold bugs always foresaw as being the day you are holding gold for, because it will go through the roof. … It begs the question, has the global financial collapse divorced itself from gold and if so, what kind of store of value is it?” Mr. Munk said.
At the same time, gold hasn’t imploded like other commodities. Metals including nickel, copper and aluminum have each fallen by more than 50 per cent. Had it tracked the price of zinc, sulphuric acid or soy beans, gold might be fetching less than $400 an ounce. Gold closed at $738.50 yesterday, down $15.50.
“That shows you that anybody who is saying it is just a commodity is wrong,” said Mr. Munk, who is Barrick’s acting chief executive officer.
So what happened? According to Mr. Munk, gold became a victim of its own success. During the darkest days of the crisis, when lending completely dried up, no one could borrow money from banks, including the world’s wealthiest individuals, many of whom the octogenarian entrepreneur pals around with.
Gold, which had appreciated sharply over five years from less than $400 an ounce, became the only source of liquidity for short-term funding obligations. From hedge funds and mutual funds to the European construction company, Mr. Munk believes selling gold was the one option many had to raise capital without taking a nasty loss.
At the same time, the unexpected rise in the U.S. dollar, spurred by the government injection of more than $1-trillion to encourage lending and prop up failing financial institutions, has further weakened the gold price.
The greenback’s stunning rise has been inversely correlated to gold’s decline. Mr. Munk believes the U.S. dollar is certain to fall and that can only mean better times for the gold price.
In response to the downturn, Barrick said it is reviewing its capital spending and could delay some projects. Mr. Munk conceded the company is also considering bargain hunting for rival gold producers amid the stock market carnage.
“When there is blood on the streets, you buy, you don’t sell,” he said.
He may not be in the CEO’s seat when the next deal happens. Barrick has compiled a short list of candidates to replace Greg Wilkins who had to step down because of illness and a decision is expected by year-end.

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