Editorial Gold price unlikely to stay down long

One can’t help but get the jitters watching gold drop $US20 in a single day as it did this past week on the London market. In New York the April futures contract sank almost $30 March 26, its steepest decline since September, 1980. But taken in a larger context, the gold price slump is far from a panic situation. This sudden, sharp drop is not likely to be the end of what has been a 6-month rally in gold prices. But even at $US370, the price of gold, compared with its 1989 low of $US355 in September, has kept up with inflation on an annualized basis.

And compared with the Japanese stock market, which plunged 22.5% this spring, gold looks positively stable.

Apart from putting the dramatic decline in gold prices into historical context, however, it is worthwhile to remember some very sound factors working in favor of stronger gold prices.

For instance, the price of gold showed surprising resilience last fall while responding to a stock market decline. Five months ago, on Oct. 13, when the Dow Jones Industrial Average fell 190 points in New York, the subsequent “flight to quality” boosted the price of gold as might have been expected. But, even though the stock market almost fully recovered the next trading day, the price of gold retained most its gains and carried them through into 1990.

Also at play is “the Japanese factor.” The weakening yen has made gold more expensive for Japanese buyers, and many are selling gold to cover losses in the Japanese stock market. However, the stock market there is now showing signs of reviving which could relieve that selling pressure. Also on the positive side is the potential for Japanese non-life insurance companies to put gold in their portfolios since they have been recently permitted to invest 3% of their assets in gold — the equivalent of about 10 million ounces.

Even the International Monetary Fund, in the publication IMF Survey, headlines an article that reviews the longer-term picture for gold with this statement: “Gold Price Decline in 1989 suggests End of Bear Market.”

Most important, however, is the political upheaval in Central and Eastern Europe. The initial response has been a strengthening of the U.S. dollar — and understandably so. After all, the move to democracy and a free market system is a vindication of the American system.

But given the currency demands of an awakening Europe and the internal problems of the American economy, it is inevitable that the need for a truly international currency will lead to a revitalized role for gold and a corresponding increase in demand.

Gold producers in North America, provided they can withstand some of these heart-stopping “market corrections,” need not fear the current volatility of gold prices. When all is said and done, the future for gold is still bright.