METALS MARKET — Gold rally is showing signs of fizzling out

Predicting gold prices is not for the faint of heart. Nevertheless, when the price broke through US$400 per oz. in early February, several analysts noted that the yellow metal was clearly in an uptrend against all the major currencies — one sign of a bull market in gold.

But at presstime, gold prices had eased back to US$402 from a high of more than US$415 just weeks earlier, which left investors wondering why the gold price had gone up only to come down again.

The World Council attributed the recent price increase to several factors, including the complete absence of economic data flowing from U.S. federal agencies (due to the government shutdown), as well as low inflation and low interest rates. “Whenever money is cheap, the cost of buying gold is zero too, in real terms, but gold is preferred to bonds,” the council notes in a recent newsletter. “The high level of stock markets worldwide demands gold as a hedge, as fear of losing capital gains roots.”

The Council also points to strong demand from countries in South Asia, which are enjoying boom conditions. There are, therefore, buyers of gold for jewelry in Brazil, mainland China, Gulf countries, Mexico, Hong Kong, South Korea, Taiwan, India and Turkey.

The bullish outlook for gold was also fueled, in part, by reports that some large gold producers might resist the temptation to sell large amounts forward.

After all, the weak performance of gold in the last half of 1995 has been attributed, in part, to producer-hedging, which rose to its highest level ever during that period. The accelerated supply resulting from the increase in mining company forward-selling positions amounted to an estimated 511 tons in 1995 (a record).

Recently, however, there have been signs that gold producers are taking a bullish attitude toward the metal’s future. Allan Hill, vice-president of corporate development for Barrick Gold, outlined changes in the company’s hedging policies during a presentation to an investment conference in South Africa.

In past years, the company has hedged a considerable amount of its production, which, in turn, has provided nearly US$70 million in additional revenue in 1995, and more than US$400 million in the past eight years.

“Ours is a dynamic strategy and we constantly monitor the markets and structure our hedge program accordingly,” Hill says. “The [recent] increase in lease rates, as well as declining interest rates in the past year, lowered the contango, or forward premium, being paid on hedge positions. In response to changed conditions, we have adjusted our gold hedge position to just under two years of production.”

The World Gold Council estimates that this will cut the amount to 5.9 million from 8.9 million oz., the biggest adjustment Barrick has ever made.

Overall, however, the markets monitored by the council turned in a strong performance in 1995, despite some softening in demand in the last quarter of that year. Gold demand rose to an estimated 2,746 tons, some 10% above 1994, and exceeded the previous record set in 1992 by 7.6%. And the council predicts that 1996 will be a year in which the high demand levels of the previous year are consolidated.

Analysts also predict that the gold market will be more volatile this year, owing to the activities of hedge and commodity funds.