EDITORIAL PAGE — The gold market

In terms of economic cycles, 12 years is a long time to wait for a turnaround. Patience may be a virtue, but for gold bugs, the return of the yellow metal’s price to some form of respectability is long overdue.

It’s true that in 1987 the gold price barely and briefly topped US$500 per oz., but that rally fell well short of the record US$850 price peak in early 1980. Since 1987, the year of the second great October stock market crash, respectability has proven to be all too elusive, save for the odd rally such as was experienced during the Gulf war.

While we wish it were otherwise, prognostications for the yellow metal, at least in the short term, are not that optimistic. Until gold dropped below US$330 this past week, the metal seemed to have consolidated its position in the US$330-340 range in spite of a stronger U.S. dollar and deflationary pressures.

A list of reasons for optimism might have included a potential rise in global tensions and possibly the outbreak of more aggressive protectionist policies. A period of inflation, too, has traditionally worked in gold’s favor but it, like a major world conflict, seems not to be in the cards.

Meanwhile, with investor interest on the sidelines, gold is caught in the old supply and demand game. After the flurry of mine development in the 1980s, there seems to be more than enough of the precious metal to go around. Or, perhaps consumers just can’t be coaxed, preferring instead to place their money in alternative investment schemes.

As other businesses, gold producers react to low prices for their commodity by cutting costs. One area particularly hard hit has been the exploration budget. In better times, a company might have a string of grassroots projects on the go. Today, one would expect that string to be shorter and the focus to be on projects that stand the best chance of entering profitable production later this decade.

Prudently weighing reward against risk is a strategy that has served more than a few gold producers well. They look shrewdly to the future. A prime example has to be Toronto-based American Barrick Resources, a favorite of the brokerage house crowd and many, many investors. In less than a decade, the company has grown from virtual anonymity to million-ounce status, earning plaudits for a variety of practices and developments, including its hedging programs and the use of autoclave technology. Barring a complete collapse of the gold price, Barrick is well positioned to keep on growing into the next century.

Of interest to gold bugs has been the debate regarding the effect on the metal’s price of the sale of gold by central banks. That market activity by governments, including those of Canada, Belgium, Brazil and Iraq, increased in 1992 is a matter of record.

But exactly what influence the selling has had on the gold price appears to be anybody’s guess. Finance Minister Don Mazankowski’s assertion, in a letter to the editor of a Toronto daily, that sales by Ottawa have not hurt the industry was sharply contradicted by the president of The Gold Institute of Washington, D.C.

The industry is hurting, and if in fact the selling of gold by central banks is to blame, then it is only one of a number of reasons. Gold bugs take heart: the waiting game continues but patience will win out.