Analysts see flat year for gold, silver

It wasn’t exactly a stellar year in 1990 for the precious metals’ industry and if analysts are correct, 1991 isn’t going to be much better. At least not for gold and silver. Last year, high interest rates and falling demand for jewelry and gold articles combined to keep the average gold price at US$384 per oz., up slightly from US$382 in 1989 but down substantially from US$437 in 1988. Silver fell to its lowest level in 14 years.

Barring any unforseen circumstances, including a prolonged war in the Middle East, most analysts see no reason why either gold or silver should go any higher until economic conditions improve.

“Most people will be looking for a flat year,” said McNeil Mantha of Toronto analyst Catherine Gignac. Like others, she says production cutbacks in South Africa and extensive forward selling (already completed) offer firm support for gold below US$360.

Tail-end producer sales also provide firm resistance at US$400, according to Gignac who expects gold to average between US$375 and US$380 this year.

Faced with a fairly stable price outlook, investment attitudes and perceptions with respect to gold equities have been undergoing a fundamental change, says Michael Jalonen, an analyst with Midland Walwyn Capital in Toronto.

The growth years of many producers are now behind them, and investors are taking a more critical view of gold issues and placing more emphasis on dividend growth potential, Jalonen says.

“The highest price/earnings multiples will be reserved for producers with above-average growth potential, ability to increase ore reserve bases, strong balance sheets and low-to-moderate cash operating costs,” he says.

Companies that meet these standards include American Barrick Resources (TSE), LAC (TSE), and Franco-Nevada Mining (TSE), according to Jalonen. Those that don’t will stagnate or worsen until gold climbs and sustains a rally above $400.

Although a possible war in the Middle East remains the “wild card” in the precious metals scene, analysts doubt that an outbreak of hostilities will spark a 1979-80 style rally.

Sparked by the fear of a superpower confrontation in Iran and Afghanistan, gold rose to US$800 in late 1979.

But although the outbreak of war could spur prices higher in the next month, Gignac says any runup would be brief and automatically followed by a sudden drop in price sparked by selling pressure.

“If peace is sustained, there is no reason for the price to run up at all,” she says.

A lengthy recession could extend into 1992 and companies will want to keep their cash levels high, Martin Murenbeeld, author of the weekly publication Gold Monitor, says. He is concerned that the demand for liquidity this year will keep gold sales high (at 3,400 tonnes for the year).

“To keep gold near the US$380- 400-per-oz. level in 1991 will therefore require more monetary stimulus than we have seen in the past half of 1990 and a weak U.S. dollar,” Murenbeeld says.

Other factors which could affect the price of gold include the recent resignation of Russian Foreign Minister Eduard Shevardnadze, according to Murenbeeld. He believes the Shevardnadze announcement is almost totally negative for gold because it favors the U.S. dollar at the expense of the German mark.

“A right-wing dictatorial leadership in Moscow — a threat which Shevardnadze offered as reason for his resignation — would not offer Germany much economic and financial opportunity,” he says.

Platinum, by contrast, is expected to benefit from the upheaval caused the Shevardnadze’s resignation. The U.S.S.R. is the world’s second largest producer of platinum and has been selling the precious metal to the West for hard currency. There is speculation these sales have not been fully met by ongoing mine production and may have come from above ground reserves. Platinum traded recently at US$416.25 per oz., down from US$513 a year ago.

A shortfall in available supplies of rhodium, one of the platinum group metals and a by-product of platinum mining, recently led to a US$500-per-oz. increase in the price of rhodium to US$5,000 per oz.

Meanwhile, silver prices recently tumbled to their lowest levels in 14 years on speculation a recession will spark a drastic cut in industrial demand for the metal. In the final week of December, silver dropped to US$3.97 per oz., its lowest since February, 1976, when the metal closed at US$3.93.

While silver regained some lost ground to close at US$4.16 recently, increased supply from such sources as Placer Dome’s (TSE) La Coipa mine in Chile (15 million oz. this year) should add resistance to any price rally.