Return of the gold bugs

This not any old forecast by a "gold bug", those gold enthusiasts, but a complete about-face by one of the staunchest pessimists on gold prices in the business.

Andy Smith is the precious metals analyst at Mitsui Securities in London.

In a business that breeds many of its own experts from the ranks of the mining industry, Andy Smith stands out as a specialist in the dismal science; a hardened economist, unhampered by too much knowledge about how gold is produced, but very clear on how its market works.

He has frequently suffered vilification from within the gold mining industry for his dauntlessly negative attitude to gold - "just a commodity" he says, but more disdainfully than others who also know this to be true.

About-face

So when he says gold is for buying, people look surprised at the very least.

His logic is that the world has been changed more than most people realise by the destruction of the Twin Towers in New York.

Gold thrives on uncertainty, and the world has shifted into a new climate of insecurity. Risks have increased markedly.

The attacks on the United States were the start of the drama, not the climax. The reaction, says Mr Smith, is yet to begin.

Stable price

That would explain why the gold price has stabilised, more or less, in the high $280s an ounce to the low $290s an ounce since its initial sharp upsurge and recovery after 11 September.

There are many in the gold market who argue that only reason the gold price has not risen farther is because central banks and some of the big investment banks are deliberately suppressing it by selling gold as soon as the price spikes.

They have never been fans of Mr Smith, but they will be lauding his change of heart.

They will agree with him that the present climate of low interest rates mean money is so cheap at the moment (especially for the Japanese) that speculation on the gold prices becomes attractive.

It is also a market that has shrunk by half over five years from lack of enthusiasm. Relatively small investment demand could have a marked effect on the price.

And Mr Smith warns that if an adventurous hedge fund takes a shine to gold - as the Tiger Fund famously did with palladium several years ago - gold could start moving very fast.

Gold standard

Calm voices in the gold industry are thankful for his change of heart, and find his logic appealing -- while pointing out that for gold to become really attractive, other markets have to become less viable.

No signs of that in today's liquidity-soaked Wall street, or anywhere else. The man-on-the-corner-of-the street in Kabul suffers too from the truth, as seen in the Turkish banking crisis, buys on the rumour of the uncertainty but sells on the fact - because by definition he needs the money.

Enthusiasts of gold, tend to forget some of the truths about gold. It was not always the favourite currency in the US, for example. The United States only adopted the gold standard from the 1870s to 1933. Other commodities had also played a part in the monetary system, even tobacco.

Before the American revolution, barter was an important form of trade.

Popular and in wide use was tobacco. But it was inconvenient to carry in any volume, so "tobacco notes" evolved, certificates attesting to the quality and quantity of tobacco in public warehouses.

These certificates were authorised as legal tender in Virginia in 1727 and were regularly accepted as such throughout most of the 18th century.

But there are no "tobacco bugs" today.