No bull market for gold in `88: Shearson

Although the worst is over for the gold price after the metal’s recent plunge to the $420-$430(US)- per-oz-range, there is no likelihood of a sustained bull market during the remainder of 1988, Shearson Lehman predicts.

In its Annual Review of the World Gold Industry 1988, Shearson writes that a heavy surplus of supply over physical fabrication requirements will combine with perceptions of reduced wealth, low inflationary expectations, fears of reductions in the rate of economic growth and a stabilizing dollar to keep values of the yellow metal broadly neutral.

The malaise in the the stock markets is an important factor in gold’s recent performance and will continue to influence developments this year, the company says.

Shearson expects gold to spend most of the year trading sideways around $420 on the basis of stagnant investor demand in the West but with rampant demand in the East taking up some of the slack.

A short-lived downward spike to $380 is possible, the company says, but any movement in this direction will be fleeting.

While the gold price will spend the early months under pressure, values should improve during the final quarter and the year should close towards the highs.

Shearson forecasts an average gold price for 1988 marginally higher than last year’s average of $446.50; the company projects an average of $450, that figure being the nearest round number above the 1987 average. Mine supply

Mine supply of gold continues to increase steadily, Shearson says, with increments of 83 tonnes and 87 tonnes estimated for 1987 and 1988, respectively. The annual rate of increase since 1981 amounts to 5.7%.

The most spectacular increases in mine supply continue to come from North America and Australia, Shearson says. Ever-increasing investment in Latin America will, for the first time, take that continents’s output over 200 tonnes in 1988.

South Africa’s influence continues to decline, both as its own output drops (falling grades, depletion of reserves) and as other production rises, Shearson says. South African output now accounts for 45% of non-Communist-world mine supply, against 68% as recently as 1984.

Break-even costs of production in Canada, the U.S., Australia and South Africa are expected to average about $237 per oz in 1988, and barring a total catastrophe in the market, few mines are likely to be driven out of production because of unprofitability, Shearson says. Fabrication demand

Fabrication demand in 1988 is likely to reflect sustained coinage interest (particularly in an Olympic year) and a slight increase in industrial usage, according to Shearson.

The company notes there is an escalating interest in gold in the Far East, and mentions India, Taiwan and Japan as countries where demand for the metal is growing.

Gold loans used by mining companies to raise funds have added at least 50 tonnes of the metal to the market since last October, Shearson calculates, and it says the widespread perception of this extra supply has helped to dampen investor sentiment so far this year.