Gold analyst Nick Goodwin reckons now is not the right time to buy gold shares.

MONEYWEB: Welcome to the Moneyweb Market Commentator podcast on Thursday, the 9th of April 2009. I'm Alec Hogg and I'm joined by our old friend, Nick Goodwin, in a week when gold, well, it sagged a little but there were enough comments or enough suggestions that gold might be going in the right direction, starting off with Paul Walker from Gold Fields Mineral Services (GFMS) bringing out their annual survey. Nick, they're very positive, they reckon the gold price will go back above $1,000, possibly even threaten 1,100?

NICK GOODWIN: Yes, I think they're talking more further down the road. I think in this year they can see perhaps some weakness because it's related first of all to the strength of the market's recovery and you will see when the Dow is strong, I mean it's come from about 6,500 to above 8,000, and then all the other markets follow suit around the world and that has an effect on gold, but I think money moves into the markets as opposed to moving out of gold. It's not necessarily moving out of gold, but there's not new investment coming in, it's just that the new investment is probably going into markets. But I don't really trust these markets, I think that this depression is probably going to surprise us all, I think it's bigger than what we anticipate and I think there are going to be bouts of bad news coming through from time to time which will knock our markets back which will then result in the gold price spiking up again. So this year could be quite a volatile year with gold moving sort of between 850 and 1,000, but I think next year when the inflationary effects of this massive stimulation that's been put into the international financial system, I mean they haven't even started printing the dollars yet, when they really start doing that, I think the gold price then would move up and probably go to the $1,100, $1,200 area.

MONEYWEB: Nick, have you ever seen anything like this before? You've been following gold for decades - have you seen a situation developing as it is right now for the metal?

NICK GOODWIN: Well, look in 1980 it was similar. It's difficult to remember that far back, but the gold price went higher then, in real terms gold at that stage went to just about 800, but in real terms, relative to today, it was actually at $1,600 it peaked, whereas we're currently just sitting at say about $900, so it went much higher then. In the last stages of that bull market you get very strong acceleration in the price and we haven't really seen that here, where you almost get like a vertical climb and it started in sort of late '79 and then moved into '80 and in those last few months you had almost like a doubling in the gold price, you see. Well we haven't seen that yet. I think we could still see that coming. The danger there is if gold goes too high then you can have a serious setback and that setback could last for a few years.

MONEYWEB: But this bull market, if we talk about extended bull markets, it's got to be one of the longest ones certainly that most people living today have seen. It turned around in 2001, the gold price then was $250, it's touched 1,000 already, but do you feel it hasn't had the blow-off and although an eight year bull market is intact, could continue?

NICK GOODWIN: Ja, look, in 1980 it was about a ten year market. It started in sort of '69, '70, so it lasted about ten years. It's always difficult to call these things in terms of the timeframe, because I don't think these things really work in terms of time zones, so to speak. It really is what's happening in the world, what's happening around you on a day to day basis, how much trust there is in various currencies and stuff. We all know about the US, I mean the US is technically bankrupt, I mean they owe the rest of the world trillions of dollars, the interest rate on their bonds or the real rate is now negative, I mean the rates have dropped so much, the prices of the bonds have gone so high, so I don't think our guys can keep on buying those bonds at these expensive prices. Historically when they've had negative real interest rates on their bonds, the gold price has been strong, but I mean having said that, gold has had quite a run and so is really due for a little bit of a consolidation, shall we say.

MONEYWEB: What about the shares. Your Suzy who is not an Asian prostitute, as you once explained to us, but it's a technical tool that you use to have a look at the way that the gold shares will be reacting - what is she saying right now?

NICK GOODWIN: Well she says the shares are high. She says that there's not a lot of value in the shares and not that they will come back, but their upside potential from here is limited. It's also dependent upon the rand and also working cost. Now I mean last year, for instance, the working cost in the industry, no, that's the SA gold industry went up by 40% and it's an extremely high level and why it's so high is that although your cost per ton went up probably by about 23%, because your cost per ton is higher than CPI because the ton or rock that you mine is always getting further and further away from your shaft, so therefore that cost is generally higher than CPI. Then also the amount of gold in each ton is reducing all the time, so your grade is dropping. I mean in 1980 when we produced 1,000 tons of gold a year, the grade was probably 14g/ton and now it's like 5g/ton, OK, so the amount of gold per ton of rock is reducing so your cost per oz rises even faster than your cost per ton which is higher than CPI. So, I mean last year was horrendous where the industry cost for the year went up by 40%. Now, I mean, all right, worldwide costs rocketed in mining because iron ore and steel and copper and oil and all these things had horrendous price increases. It won't be that big this year, but it will still be above CPI, so we're probably this year looking at about 15%. So on the one hand you've got that sort of erosion of margins from costs, you've got a gold price which might be flat, you've got a rand which has been relatively strong, OK, surprisingly, and if the dollar is weak, I think the rand will remain relatively strong. So you could get some margin squeezes here which means that the profits this year could be not lower than last year, but lower than this current quarter. In this March quarter we're going to have record profits from AngloGold gold shares and all those mines, but I think that will be the best that we've seen for this year, I think going forward now those profits will be lower.

MONEYWEB: Why will they be record in the March quarter?

NICK GOODWIN: Well the gold price in rand terms in the March quarter was ... level. The price increased by 14% from the December quarter to the March quarter and also there's, I mean for instance Gold Fields have got some new mines coming through, they've got Cerro Corona in Peru which is coming through, it's a very rich mine, so Gold Fields in particular is going to have very good results, AngloGold will be up, Durban Deep will be up and basically it's because the rand gold price has been so strong in this quarter.

MONEYWEB: Nick, it's interesting to have a look at the gold index on the JSE. It's at 2,400 today, down another 3%, and that 2,400 compares with over 3,000 for much of 2006 and 2007 and in fact all the way down to about 1,400 late last year. Now it is volatile and you've often said that gold is not something to hold, but something to trade. Is it a trade now?

NICK GOODWIN: No, it's not low enough for a trade yet, it needs to go lower, probably round about the 2,000 area, I would say, if not, lower than that.

MONEYWEB: So still another 20% drop from the current level?

NICK GOODWIN: Ja, ja, look the low in 2000 was 740 on the index. It then rose up and then came down again in 2003 to about the same level, but then moved up in 2005 to 3,400 - now we haven't seen that yet, I don't think we'll necessarily see that this year, I think we need to see a new low before, you know, the shares become a buy again.

MONEYWEB: So although the gold price itself looks like it's in a comfortable area, the gold shares, for the reasons that you articulated earlier, are not necessarily the place to put your money. So would go for Krugerrands or the new gold index?

NICK GOODWIN: Ja, ja, I'd say so, because I mean there you've got a rand link situation and also the dollar gold price and also there's no inflationary impact on the rand gold price because it doesn't get eroded by costs, OK, the big problem with gold shares is that the mines' profitability is eroded by a continuous increase in costs.

MONEYWEB: So possibly wait for the gold index to get down to around the 2,000 level again, then you can go back into shares, but for the moment the new gold index or Krugerrands, the best place to be?

NICK GOODWIN: Ja, I'd say so, ja.

MONEYWEB: And internationally, if you are listening to this podcast perhaps in the United States, is it worth buying some American or Canadian gold shares?

NICK GOODWIN: Ja, look, I don't follow them, I'm not quite sure how expensive they are and also I think the cost increases there are not as high as what they are here because - it depends on what currency you're dealing with here. Obviously the Australian dollar has been weak as well, so they've probably also got quite high cost increases. I can't really say what the situation is with them. I would say they will be more directly linked to the dollar gold price than what we are.

MONEYWEB: Nick Goodwin, gold expert and the man who is a good friend of this programme, good insights from him on the gold price. This Moneyweb Market Commentator podcast will be back again on Tuesday.