Still holding over $400: Strong dollar key to gold’s slip

When the U.S. dollar strengthened during the past week, gold prices dipped sharply, further evidence that the overiding factor in gold markets continues to be the relative strength of the U.S. dollar.

More and more, gold is becoming the de facto international currency. The Japanese yen, German deutschmark, Swiss franc, British pound and U.S. dollar all fluctuate daily on the increasingly liquid international markets, but the one benchmark remains gold.

That explains, at least partially, why the U.S. denominated price for gold is so susceptible to the variations of the currency. If dollars are cheap, it takes a lot of them to buy an ounce of gold: if dollars are dear, it takes a lot less to buy the same ounce of gold.

That’s what happened this week as the morning fix for gold bullion in London dropped from $426.60 Oct 22 to $407.75 Oct 29. Over the same period, the American dollar surged. For example, during the week ended Oct 26 the dollar was up 4.8% against the yen.

The dollar was up largely on good news about the U.S. economy, specifically that U.S. durable-goods orders were up sharply in September, the best monthly increase since November, 1984, and that U.S. economic growth also improved in the third quarter.

But the dollar has been declining for the past 18 months and, unless there’s more evidence that the American economy can sustain some improvement, that decline is unlikely to stop. The American government wants the dollar to stay down in order to make American goods more cost competitive abroad, thereby reducing recent huge trade deficits.

Meanwhile, the U.S. consumer price index increased just 0.3% in September according to the Department of Labor, indicating that inflation is still well under control. Investors see gold as a prime hedge against inflation, so with no threat of inflation, the appeal of gold is lessened.

In South Africa, where nearly half of the Free World’s gold comes from, labor contracts have been settled although there have been problems. For instance, almost 40,000 black miners went on strike in support of wage demands at three gold mines owned by Gold Fields of South Africa. Gold Fields did not join four other South African gold mining houses in recent wage talks, but decided to go it alone and gave black workers wage increases ranging from 15% to 20%. Anglo American, JCI, Gencor and Rand Mines gave wage increases ranging from 19.5% to 23.5%.

Still, relations are still tense despite the wage agreements. September’s disaster at the Kinross mine where 177 miners were killed combined with the South African government’s decision to repatriate Mozambican miners has increased tensions.

Elsewhere in gold:

*Australia has started promoting sales of its 99.99% pure gold coins called the Australian Nuggets. The coins will be available in one-ounce, half-ounce, quarter-ounce and one-tenth ounce sizes.

*The South African Reserve Bank is thinking of buying back the gold it swapped earlier in the year as part of the arrangements it made to fund its $500-million (US) foreign debt. The bank’s gold holdings fell from 385 tons in September, 1981, to 120 tons in September, 1986. An attempt by the bank to rebuild those reserves would be bullish for the price of gold.