-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --
By Christopher Swann
NEW YORK (Reuters Breakingviews) - Coal will never displace gold as jewelry. But it has started to outshine as an investment. While gold's steep rally is threatened by a return to normal monetary policy, surging demand from Asia is pushing coal prices skyward. For those fearing higher inflation coal may be golden.
In recent years gold enthusiasts have every reason to feel smug. Those looking to the metal as a haven in troubled times have not been disappointed. As central bankers revved up the monetary printing presses since the collapse of Lehman Brothers, the price of bullion has climbed 75 percent to around $1,350 an ounce.
Still there are signs that the rally is running out of steam. Gold funds have started to suffer outflows and the price is off its peak. And the reversal could get worse for gold bugs. As markets anticipate an end to monetary easing, rising interest rates could start to seduce investors away from gold. More buoyant equities also make gold look less alluring.
At first blush, coal looks like an implausible alternative. If storing gold is a hassle, coal is many times worse. A short ton of Appalachian coal fetches $75, compared to $43 million for the same weight in gold.
Even so, coal has considerable appeal for those seeking an inflation hedge and exposure to commodities. Flooding in Australia's coal rich state of Queensland has been just the latest bullish development. Long after Aussie mines recover, demand from India and China will continue to underpin prices. The duo recently emerged as among the greediest importers of coal -- buying 10 times more from overseas than in 2003. And India's coal minister believes demand for the black rock will triple in the next two decades.
Of course, coal has drawbacks too. Futures contracts are less liquid than gold or oil, making them potentially hard to exit. And all listed U.S. coal companies together are worth just $60 billion -- less than a sixth the size of Exxon Mobil alone.
But despite a modest retreat in January, Australian coal has already slightly outpaced gold so far this year, up 30 percent, and U.S. coal firms have racked up even more impressive gains. As an investment, coal has been neglected for too long.
-- Continued strong coal demand in Asia, plus unresolved logistical bottlenecks, is expected to push coal prices higher for 2011, according to analysts polled by Reuters.
-- Coal prices rose by more than 30 percent in the past year due to these factors but upside potential remained, analysts said. Bank of America Merrill Lynch believes the rally has only started and expects all grades of coal to move higher. It predicts Newcastle thermal coal will average $107 a ton, up from $91 in 2010.
-- Freak weather caused disruptions to exports in almost every major coal producing country in 2010.
-- The International Energy Agency believes world consumption of coal will increase by a fifth over the coming 25 years. The agency also believes that China will build 600 gigawatts of coal-fired power generation over the next 25 years - equivalent to the current generating capacity of the United States, Japan and the European Union combined.
-- Meanwhile the largest gold exchange traded fund, the SPDR Gold Trust, recorded its second-biggest monthly outflow in January, while gold prices posted their worst monthly performance since December 2009, falling by 6 percent.
-- Reuters story: POLL-TABLE-Coal prices to rise in 2011 [ID:nLDE7170WM]
-- For previous columns by the author, Reuters customers can click on [SWANN/]
Editing by Rob Cox and David Evans