Strong demand, U.S. fears stoke a rush to gold

Mr. T, your investing strategy is finally paying off.

The big, angry dude with all the gold chains has been getting a lot richer around the neck. In fact, the last time bullion was worth this much, he was still (sort of) famous.

Gold futures rose $5.60 (U.S.) to $459.30 an ounce in New York yesterday, the highest close since 1988. The spot price rose $5.70 to $455.50. The gains lifted the S&P/TSX gold subindex 1.9 per cent, the strongest sector of the day on the market. (The S&P/TSX composite rose 33.91 points to 10,966.32.)

The precious metal is up more than $20 since the start of September -- a move that, like everything else these days, can be linked to hurricane Katrina. For gold analyst John Ing of Maison Placements Inc., the Katrina connection is so strong that he has adopted New Orleans-esque parlance for gold: "It's the sole levee against the floodwaters of financial disaster."

Mr. Ing said the high costs to the U.S. government of rebuilding from the disaster should further bloat the huge fiscal deficit, implying downward pressure on the U.S. dollar and, consequently, rising fortunes for gold as the currency's traditional foil. He added that with the storm having disrupted energy and agricultural production and shipments and pushing up prices, "inflation is rearing its ugly head" -- and gold is also a traditional hedge against inflation.

This comes against a backdrop of strong fundamentals for the metal. Demand has been surging, outpacing supply growth for the first half of the year. Analysts note that gold has only just entered a period of seasonal strength, which should mean more upward potential over the fall.

"The last few years have shown that September-to-November is a good time to be investing in gold," said Steven Butler, gold analyst at Canaccord Capital.

Part of the reason is strong demand from jewellery makers as they ramp up for Christmas and for Diwali, India's biggest holiday. Jewellery is a traditional gift of Diwali, and India is the world's biggest buyer of gold jewellery.

Despite the 17-year highs for gold, the TSX gold sector is still trading below its levels of last November, and is 10 per cent below its peak in the fall of 2003. Nevertheless, Mr. Butler said the group's price-to-net-asset-value multiples are nearing their November 2003 highs.

"We are getting a bit pricey," he acknowledged, suggesting gold stocks could pull back a bit over the next couple of weeks. "We are due for a bit of a correction, but we're still in for a good fall run here."

Wal-Mart's lighter load

It's not as if Wal-Mart shareholders didn't already have problems. High fuel prices are weighing on consumers, and the retailer's low-end target demographic is particularly feeling the bite. U.S. retail sales slumped 2.1 per cent in August, and that was before Katrina hit. Wal-Mart's stock has slumped almost 10 per cent since the company issued a profit warning a month ago, and is down 16 per cent this year. But now, adding insult to injury are the index-keepers at Standard & Poor's.

Starting next week, the S&P 500 index will complete its transition to calculating component weightings based not on the market value of all shares outstanding, but rather on each stock's free float -- the shares available to the public, excluding holdings of insiders. As a result, Wal-Mart, whose stock is 40 per cent owned by the family of founder Sam Walton, will see its weighting in the index shrink to 1 per cent from the current 1.3 per cent.

Index funds tied to the S&P 500 will have to unload Wal-Mart stock to bring their portfolios back in line with the new weighting. Bloomberg reported yesterday that, based on estimates from Bear Stearns, funds will have to sell a whopping $3.5-billion of Wal-Mart stock to make the adjustment. That's the biggest hit of any S&P 500 company.

Correction

Standard & Poor's Corp. is adding five new stocks to the S&P/TSX composite index, and is deleting 13 stocks. Incorrect numbers were published in yesterday's column.

dparkinson@globeandmail.ca