Economic slowdown brings lower prices for gold

Although 1988 is still young, anyone expecting the price of gold to carry on from the high levels of last year may be forgiven for having second thoughts. The precious metal, which closed 1987 at $486.50(US) per oz, was trading in New York in the $445 range at presstime.

One popular reason given for the sliding price is a slowdown in the U.S. — and world — economy, and the laying to rest of fears that higher inflation may be just around the corner.

“I think its indicative of increasing investment awareness that a slowdown in economic activity will lead to a drop in the rate of inflation,” Vay Jonynas of Moss Lawson of Toronto told The Northern Miner. “And inflation is the single most important determining variable of gold-price changes.

“Simply put, without inflation, who needs the gold?”

Jonynas said recent history indicates the price of gold drops as the economy slows down. He predicts a decline in the price of the yellow metal to $300 in 12-18 months.

Michael Nicholson, an analyst with MacDougall, MacDougall & MacTier of Toronto, expressed similar thoughts. “The sentiment is we’re moving into a recession,” he said, adding that the current general feeling seems to be that a downturn in the econony is imminent, there is no immediate sign of inflation and the troubled U.S. dollar is stabilizing. Production costs

A gold price above $400 will provide substantial returns for most of the mining companies whose operating costs are below $300 per oz; the vulnerable companies are those with a gold production cost above that level, Nicholson said.

Stocks of Canadian gold mining companies reacted negatively this week to the falling price of the precious metal, which in 1987 briefly topped $500 in London and which averaged $446.50 for the year.

Two other precious metals, silver and platinum, are not performing well, the latter in particular. Platinum, which traded as high as $644 per oz last year, is reportedly in oversupply and was selling in the $460 range at presstime. Silver has been trading in the $6.60-per-oz range of late. Inflation worries

On inflation, Guardian Trust of Toronto, in a report prepared by Cavelti Capital Management, expresses long-term concerns. “Many short-term factors, such as the growing oil surplus and the vulnerability of the heavily indebted consumer, actually suggest a trend of continued disinflation,” says the report.

“But another crucial element is economic activity: to what extent will the world economy slow down and, just as important, how will the monetary authorities react?

“Looking at the few alternatives available to the Federal Reserve Board (in the U.S.), it is probably a safe bet economic damage will be kept to a minimum, which could have critical inflationary consequences in 1989 and beyond.”

Toronto gold price forecaster Martin Murenbeeld, in a recent weekly report, points out that gold suffered a drop in price in 1973 and 1978 when the U.S. dollar bottomed, with the price falling 20% over six weeks in 1973 and 17% over a 5-year period five years later. The gold price both times rebound ed to new highs.

“Assuming the dollar’s bottom occurred in the last week of December, 1987, history would suggest we have another one-two weeks to go (about mid-February) before the market can have a change of heart,” he writes.

Shearson Lehman Securities reports Newmont Mining in the U.S. is arranging a “massive gold loan,” which could potentially have a further impact on the price of the precious metal.