Analysts look beyond Gulf War as gold price defies predictions

Gold failed to regain its shine as war in the Persian Gulf entered its second week. Shaken by a US$19.50 overnight drop in the gold price as United Nations forces took their first run at Iraq, investors are shying away from the unpredictable precious metal. By presstime, gold had dropped to US$377.90 even as oil jumped to US$24 a barrel and Iraqi missile attacks on Israel threatened to expand the boundaries of war.

But some analysts are trying to look beyond Gulf crisis in assessing the prospects for gold. Major price swings, they say, are more likely to be caused by changing fundamentals.

“I don’t put the Gulf situation into any of my forecasts,” said Carlos Leitao, gold analyst for the Royal Bank. “We try instead to look at the big picture over the next 12 months.”

The “big picture” includes such underlying factors as the length and gravity of the current recession, the U.S. dollar, interest rates, and the gold supply.

“As long as we are not faced with a prolonged war, I am confident that the fundamental economic forces in the international economy will quickly resurface,” says Martin Murenbeeld of Victoria, B.C., who publishes The Gold Monitor.

But he adds that while these forces — a weaker U.S. dollar, lower interest rates and an eventual upturn in the growth rate of North American monetary aggregates — are positive for gold, he remains a “supply pessimist.”

“We know about the financial pressures on the USSR; add to this the fact that the reconstruction of the Gulf area will also require massive amounts of liquidity . . . my supply outlook for 1991 is bearish.”

The tendency for major companies to sell their gold as soon as the price picks up is also negative for gold. Even the huge South African mining houses, which have traditionally avoided forward selling, are beginning to hedge their gold production.

“Three times last year when gold went above US$400, the price immediately came crashing down as producers and especially the Soviet Union started selling,” said Leitao. “One would expect that they will continue selling gold — this will dampen any upward pressure on prices from renewed investor interest.”

Barring a prolonged war in the Gulf, many analysts are calling for only minor gains in the gold price in 1991 as the economic fundamentals improve. But none are willing to speculate on the changing tides of investor sentiment as the war continues.

“Little can be cast in stone at this point,” says Murenbeeld. “The price risk range remains extremely wide.” Average annual gold price, London second fix: 1990 US$383.47 1989 US$381.43 1988 US$437.05 1987 US$446.47