Central bank sales cap gold price

The future direction of the gold price is of keen interest to many market-players. The price has been propelled by an expectation that inflation rates will rise sharply; this is seen as a possible consequence of recent attempts at economic reactivation by governments within the Organization for Economic Co-operation and Development (OECD).

Gold prices to date for July (with June averages in parentheses) moved ahead to US$391.18 ($371.91). However, the traditional factors affecting inflation-driven gold prices are not yet evident, so we searched for other explanations.

As indicated in the Gold ’93 report by Gold Fields Mineral Services, there is a growing imbalance between annual supply and demand.

On the supply side, 1992 mine production and old gold scrap volumes rose to 2,276 (2,182) tonnes. As a result of well-known difficulties, east bloc sales were 66 (222) tonnes, the lowest level in many years. The 1992 total of the above annual production output from all normal sources was 2,342 (2,404) tonnes.

On the demand side, 1992 industrial fabrication requirements (particularly jewelry) totaled about 2,859 (2,571) tonnes. Obviously, current prices are strongly favorable to sharp increases in demand. As prices rise, volumes should slowly abate.

When compared with demand, the 1992 annual shortfall of 517 tonnes had to be made up by all other above-ground inventories. These are in the hands of central banks and other investors. Miners, gold loans, options, hedging, forward sales and — most important — private investor activity are sources of all other buying and selling. From year to year, these other influences ebb and flow and occasionally force prices up when net buying becomes hectic. However, until recently, this has not been happening. The reason appears to be the central banks which are buying and selling their monetary reserves. Several OECD countries (Canada included) have announced a policy to reduce the gold portion of their reserves and hold the equivalent in foreign exchange currencies. In the past decade, Canada has been an ever-increasing seller. In 1992, sales were 94 tonnes. At current rates, 1993 sales will reach 115 tonnes, leaving about 250 tonnes in reserves at year-end. Countries such as Japan and Taiwan, which have become large holders of these foreign currencies, appear about to swap them (directly or indirectly) for gold. Obviously, these governments are not concerned with having too much gold in their vaults. As a group, Western governments with large deficits and trade imbalances are the net sellers, with mainly the Far Eastern countries actually adding to their reserves.

As noted in the accompanying chart, over the past decade central banks appear to have deliberately bought and sold each year, depending on the net annual supply-demand situation and other factors in the market. The net effect has been stable gold prices.

Current low prices are accelerating industrial demand (particularly for jewelry consumption) while reducing mine output.

It will be interesting to see how much further Western governments will go to support gold prices by reducing gold reserves.

In 1993, higher gold prices will reduce jewelry demand and eventually encourage more production. In the short term, however, if central banks do not cover the apparent annual supply shortage, the price will rise to draw out additional above-ground stocks and slow down demand.

Other metal markets were generally quiet as the summer holiday period is well under way in Europe and North America. Ignoring the seasonal aspects, markets in North America are rated good. Europe is still very slow while Japan appears to be improving.

After easing down early in July cobalt spot prices steadied at $12-13 per lb. Western brands are at $13 ($14.50), Russian $9-10 ($13) and producers officially at $18 ($18) but discounting.

The London Metal Exchange (LME) nickel inventories which disappeared so suddenly are reappearing along with a rumored 14,000-tonne shipload from Russia. Average LME nickel in July (June in brackets) sagged to $2.34 ($2.51) per lb. as LME inventories rose to 95,772 (86,646) tonnes.

Buoyed by a threatened U.S. labor disruption and still testing the downtrend line, copper prices in July recovered to US$0.875 (84 cents) as LME and Commodity Exchange of New York inventories also continued their slow rise, reaching 557,699 (542,264) tonnes.

Molybdenum oxide was quiet, with prices at $2.25-2.30 per lb. ($2.15). On continued news of secondary refiners closing, lead LME prices drifted to US17 cents (18 cents) as LME stocks steadied at 263,925 (261,675) tonnes. (Our last report indicated U.S. government sales this quarter at 45,000 tonnes. This number should have been 15,000 tonnes.)

Zinc LME stocks climbed again, reaching 706,100 (687,875) tonnes as prices held at US42 cents (42 cents).

In other precious metals, silver, like gold, jumped to US$4.98 ($4.37) per oz. Continued support by investors and improving North American auto numbers pushed platinum ahead to US$401.18 ($383.69) and palladium to US$139.07 ($126.89). Still under pressure, rhodium eased again to US$800 ($925). — Jack Dupuis is a metals marketing consultant in Thornhill, Ont. He publishes a monthly metals newsletter, “Metopine”, for clients.