The quarter was characterised by a sharp rebound in the gold price to over $390/oz, well over the highs of $384/oz achieved at the beginning of February. The gold price was at such levels back in the middle of 1996. Initially geo-political concerns were exacerbated by Bomb blasts around the world, various black-outs in developed economies, virus attacks on websites and concerns around the second anniversary of September 11. Record long speculative positions in gold have been in place recently.

During the quarter, the gold price also decoupled from its usual relationship with the US dollar. The US dollar initially strengthened to 1.08 to the euro without having any adverse impact on the gold price. However, in September, the dollar started to weaken against the euro once more to the 1.15 level. The G7 group of developed countries have called for more flexible exchange rates around the world leading to speculation that the US dollar would weaken further against other major currencies. Takeover talks also provided some impetus to the sector with Anglogold launching a bid for Ashanti Goldfields of Ghana.

After a poor set of quarterly results due to the lower rand gold price and lower grades from key mines, the South African gold producers are facing the prospect of another tough quarter. The 10% wage increase agreed with the unions will weigh down on margins while the strong rand has also partly negated the effect of a rising dollar gold price. The gold index has nonetheless posted tidy gains during the quarter and the possibility of further gains remain if the rand weakens considerably from current levels. The fund manager's however remain cautious as they expect subdued forthcoming results from gold companies.

Fears of global deflation continued to support the gold price this quarter, which was translated into a sharp depreciation of the dollar against the euro. Producers continuing their de-hedging activities have supported fundamental demand for gold. It is worth noting that speculative demand became an even more important factor driving marginal demand, with the sagging greenback leading to record long positions in gold on the commodities exchange. However, gold bulls ignored the relief rally in the global equity markets following the conclusion of the Iraq war and continued to focus on economic news, which has remained mixed.

The US dollar has staged a comeback against the euro recently but consensus remains that the greenback will resume its weakening trend on the back of the huge twin deficits in the US. Relaxation of US interest rates to fifty-year lows and a loosening monetary policy stance in Europe reflect some of the drastic policy initiatives to revive global growth. Nonetheless, risk aversion remains high, which should support demand for gold as a safe haven currency.

Corporate activity in the sector is being driven in part by the requirements of the Mining Charter. However, the rand, which has strengthened further over the quarter, is putting pressure on the rand gold price. Allied to cost inflation and a potential two-year industry wage negotiation process, which could settle at high levels, margins for local gold producers remain under pressure. This will translate into further earnings declines in the forthcoming reporting period. The fund manager's therefore caution that gold equities might still face tough times ahead.

The fund manager's view has been that there are quite a number of factors supporting the gold price fundamentally. These include the natural deficit between jewellery demand and new mine production; the anticipated peak of mine supply with potentially sharp reductions in global mining output in the medium term; and low interest rates. All these have helped to reverse some negative factors that were overhanging the gold market in the past, namely producer hedging and short selling by speculators. In addition, concerns about the global economy have obviously grown as world equity markets have tumbled and gold has regained some of its traditional safe haven status. Furthermore, several analysts are anticipating continued weakening of the US dollar, which is highly correlated with the gold price.

In the short term, however, the gold price will be subjected to the developments in the Middle East. The yellow metal weakened with the onset of the assault on Iraq as the market discounted the war premium in anticipation of a short campaign similarly to that of the first Gulf War in 1991. Since then, however, it has emerged that the war might take a great deal longer than initially estimated. In particular, there does not seem to be any idea of what should follow after the cessation of military action. Without any support from the Iraqi population for their US style "liberation", the foreign troops might be seen as unwanted aggressors and might have a very tough time ahead of them - much tougher than expected. One could draw a scenario where public opinion against this war escalates and starts posing a threat to other regimes in the Middle East. That would have the potential to drive both oil and gold much higher.

The gold price broke though major resistance in mid-December to reach $350/oz, a new six-year high. Many analysts attributed this move to a war premium as a result to the Iraqi situation, although the price had risen from $250 to $320/oz even before Iraq started to become a real issue. The fund manager's view is that there are quite a number factors supporting the yellow metal at this time, including: the "natural deficit" between jewellery demand and new production; the peaking of global mining output; and the low interest rates, which have reversed producer hedging and short selling by speculators. In addition, concerns about the global economy have grown as world equity markets have tumbled, with gold returning to its traditional "safe haven" status. Many analysts are also anticipating continued weakening of the US dollar, meaning that there are not many attractive alternatives at the moment.

Gold shares have obviously recovered with better gold prices, but they are still off their May highs. In terms of their ratings, the fund manager's consider them expensive at this stage so the gold price will need to rise even further to justify current prices. In the short term, earnings are expected to fall because the strengthening rand and the rising SA inflation have more than offset high dollar metal prices.