Heightened tensions in Middle East send bullion, oil prices soaring

Increased tensions in the Middle East pushed the price of gold bullion at presstime to US$384.75 an ounce after it rose sharply from a 4-year low of US$345.50 an ounce in June. Heavy selling by Arab syndicates was behind the June price drop, while the recent upswing is being attributed to investor fears that Iraq’s invasion of Kuwait may draw the U.S. into a Mid-East war.

World oil prices have also become extremely volatile with the escalating crisis in the Mid-East. This week as an armada of U.S. military forces headed for the Persian Gulf, oil hit a 5-year high of US$28.31, up nearly 70% from US$16.72 as of July 2.

Analysts said the prospect of sustained higher oil prices will most certainly bring higher inflation, and that news caused gold share prices to fluctuate wildly.

While some observers feel the market is over-reacting, other analysts suggest North American gold equities may now face a period of relative improvement.

“The recent developments in the Middle East are very positive for gold,” said Catherine Gignac, an analyst for securities firm McNeil Mantha. “Investors who are not currently holding gold equities may now move into the market,” she said, adding there will likely be some heavy selling by profit takers, but some large buyers could also come back into the market. Gignac is forecasting a gold price of US$400 by year-end and an average price of US$425 in 1991.

“This is an obvious buy signal for investors who have not been holding gold stocks,” she said.

Often considered as the last refuge of security in times of economic uncertainty, investors can find plenty of reasons for insecurity these days.

“Gold is an emotional metal,” explained Ron Coll, an analyst with securities firm McLean McCarthy. “Probably 50% of what affects the price of gold is emotion.”

Coll thinks gold could see another $20 added to its price before the Mid-East tensions blow over, but he said it could just as easily fall back again, He predicts gold will average US$380 this year and US$425 next year, assuming interest rates fall and the U.S. dollar weakens.

Senior companies may take advantage of the recent price increase by hedging some of their future production or taking out new gold loans at higher prices.

“The key area to watch will be the blue chip sector where there is still plenty of room for improvement on the up side,” said Coll.

Rising gold prices propelled gold equities higher. Among the senior producers posting gains were Placer Dome, LAC Minerals, Teck Corp. and Echo Bay Mines.

“I am optimistic that gold can rally back to the US$390 level over the next six months,” said gold- price forecaster Martin Murenbleed in his publication The Gold Monitor.

Another well-known gold analyst, Peter Cavelti, also thinks that North American gold shares will continue to benefit as South African and Australian markets become less attractive.

“Of the major markets, only North America offers conditions that are generally stable and favorable for mine development,” said Cavelti in Gold Mines Report. “The scope for growth, particularly in the Carlin gold belt and Eskay Creek area of British Columbia, is substantial and exciting.”

Gold mining is an important contributor to the economy of Canada, the free world’s fourth largest gold producer after South Africa, the U.S. and Australia. Total gold output in Canada this year is forecast to reach 5.6 million oz. up from 5.1 million oz. last year and 3.1 million oz. five years ago.

But output losses have been mounting as several high-cost mines across the country were forced to suspend production in the face of slumping prices earlier this year.

The weighted average production cost for gold mined in Canada is about $249 per oz., according to Gold Fields Mineral Services. Cash costs for the Western World are as follows: 0500,0400,0206,0000 Production Cash Costs 1989 1988 (US$/oz) (US$/oz) Western World 250 250 South Africa 276 275 Canada 249 245 Australia 247 236 U.S. 209 206