Editorial There won’t be an oversupply of gold

The price of gold has been rather sluggish of late, breaking that so-called $440(US) barrier on the downside again this week. Naturally, this is causing some concern in investment circles, certainly that of the gold bugs, many of whom have been predicting much higher prices.

There are, of course, numerous happenings that drive the gold price up and down, some of which go back almost to the beginning of time. It is a free market and a big one. However there are several strong new factors that are unquestionably impacting on the current situation. This includes the growing production of new gold coming on the market and the granting of “gold loans” by the banks who are now lending gold bullion from their vaults to mining companies at low interest rates. These companies, in turn, sell it on the open market for instant cash. But this all has to be repaid in kind.

Granted that Newmont Mining’s recent million-ounce loan, which received a lot of press, certainly did have an effect on the market when it was suddenly dumped. The metals research department of the London firm of Shearson Lehman, which keeps a close eye on the world gold picture, says there could be as much as 120 metric tons of gold out on this kind of loan today. And now there are reports that Australia’s mining giant, Western Mining Corp. Holding, has just hedged two million ounces of its future gold production to finance its expanding gold interests including its recent Canadian activities. And of course quite a few of our own producers sell much of their gold production ahead. That the gold market has absorbed all this selling — gold that will have to be repaid — could actually be construed as bullish.

Nor can we concede that there is, or likely to be, any oversupply of gold — certainly not as long as we keep flooding the world with paper money of questionable worth. Today, the world’s central banks are printing paper money at a rate five times that of the world’s gold production.

We have yet to see a year where world gold production increased by as much as 7%. Yet we see the U.S. government debt (a country that boasts the world’s leading currency) growing 14% annually for each of the past five years.

What happens when the holders of these mountains of paper money, which is deteriorating in value continuously, want to cash in their chips for something more solid? The Japanese for instance hold tremendous amounts of U.S. dollars. They are not a stupid people and well know the value of diversification. If they chose to put just 10% of their U.S. dollar holdings into gold, that alone would absorb half of the Free World’s annual production. And there are a lot of other worried people around this old world who would dearly like to get their hands on gold instead of paper.

The gold mining industry is still a very, very healthy one, thank you. And it would still be at a $400 price tag. Canadians are highly efficient producers of this metal. Hemlo Gold’s costs, for instance, are currently running under $100 per ounce, while the average cost for this country is probably around $200.