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WISE MEN DON'T BUY GOLD
Prepared by Technical Data
A Division of Thomson Financial Networks
With the turmoil seen in the global markets over the past few weeks, the search has been on for safe havens for investment funds. In the past, this is the sort of climate when one would expect the gold price to head higher, as funds move into the precious metal. However, times have changed. Far from benefiting from recent events, the gold price is currently under extreme pressure and looks likely to move even lower as the overall outlook remains bleak.
The gold price has been on a downward trend since it peaked at $417.50 an ounce back in February 1996, but the recent flirtation with the $300 level marked a 12- year low. The event that has sparked this latest decline came last month, with reports from an official Swiss body recommending that the country should sell some 1,400 tonnes of the 2,590 tonnes held in the central banks reserves. This announcement prompted a $16 fall in the spot gold price, the largest single day decline since 1993. This happened despite the fact that the proposed sales are to be phased in over the next decade, and unlikely to commence before the year 2000.
Central banks have been sellers of gold for some time with Belgium, Holland and Canada particularly active. However, the trend gained additional momentum earlier this year when Australia announced that it had unloaded over 60% of the total held in its reserves. Over the first half of this year, central bank gold sales totalled 220 tonnes against 239 tonnes over the whole of last year. When considered against global central bank holdings of gold, the sales seen to date represent a trickle, but when one considers that the United States holds 8,140 tonnes, Germany 3,700, and France 3,182, it is a developing trend which is being viewed as a major concern.
Other background factors do little to alleviate this central bank inspired gloom. Producers continue to sell into any rally and local currency woes in Asia have seen demand decline drastically. To fuel a sustained market recovery, it is estimated that mine capacity needs to be reduced by around 350 tonnes, and only a sustained fall in price to around $250 will achieve this.
The most vulnerable to mine closures appear to be the deep mines of South Africa, where positions are largely unhedged, and production costs are the highest. Other potential closures are expected in both Canada and Australia, though these appear likely to be limited to high cost operations with constrained reserves.
Against this current scenario, the outlook appears distinctly gloomy for the price of gold. A clear break below the key psychological level of $300 may now prove to be the trigger for stop/loss sales, which could trigger a fresh wave of selling. A significant turn in fortunes looks some time away. With ample scope seen for a further shake out in the industry, it remains to be seen how long the world's central banks will continue to sit on a declining asset as a major part of their reserves. In particular is the case of European countries where after monetary union, far lower levels of reserves are likely to be required.
December, 1997 Paul Downs, Director of Foreign Exchange
Technical Data
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