EXPLORATION ’92 — Gold market showing little sparkle

Canadian and Belgian central bank gold selloffs, Japanese investors liquidating assets and the post-electoral doldrums in the U.S. are all cited as reasons for continued soft gold prices.

However, gold experts maintain they are at a loss to explain the lacklustre market despite increased demand for the precious metal. “It’s a mystery,” admits Michael Brown, spokesman for the Gold Institute, citing an increase in gold consumption registered by the jewelry trade, one of the largest consumers of gold.

The World Gold Council reported that gold jewelry sales in the U.S. increased by 2.8% in dollars and 3.9% in units in the first half of l992, compared with the same period last year. Total sales were $3.25 billion for women’s and men’s jewelry in which gold was the primary content.

However, a clear signal that shoppers are being conservative came in the surveys conducted by store type. While department, chains, and independent jewelry stores represented more than half of total sales, they showed only gains of 3.3% to 3.1% in sales. By comparison, discount stores showed the most dramatic rate of growth at 14%.

Not even the breakup of the former Soviet Union, which has resulted in a significant drop in gold released onto the international market, and marginal decreases in South Africa production has created a scenario that has seen prices rise.

In l990, the Soviet Union produced 425 metric tonnes and in l991, 226 metric tonnes; the decline is expected to decrease further this year. Brown says South Africa’s decrease in production is often over-exaggerated. The decline has been only marginal, “not even l0%,” he says.

“They continue to produce a substantial amount,” he says. “We have seen it flatten and decline slightly, but continue to flow. These are very expensive mines to operate and should they shut down, they would probably never reopen. So, they will go to any length to keep them open.”

In l990, the South African mines produced 620 metric tonnes; in l991, output was 601 metric tonnes.

Keith Steeves, marketing manager for Teck (TSE), says all the traditional factors that triggered gold prices to climb are today failing to stimulate pricing. Wars, inflation and wavering exchange rates are all no longer factors in moving gold prices forward.

“We have just been through one of the most severe exchange crises we have seen in a long time — sterling was under great pressure and the Canadian dollar was under great pressure — and no one hedged into gold,” says Steeves. In fact, gold values dropped. Not even inflation has tugged gold forward. “No one is afraid of inflation anymore,” maintains Steeves.

One sign being noted by gold analysts is a tendency for non-traditional markets to buy or increase their purchases of gold. Jewelry gold and pure gold is moving in an area that Brown calls the “Old Silk Road” along Turkey to the newly-emerging industrialized Asian countries. There has been increased interest in jewelry fabrication.

Taiwan, for example, has become an important market and according to a Gold Institute press release, “nearly l,000 goldsmith shops in the middle and south part of the island and a recent law that standardizes the purity of gold have helped increase interest in gold.”

Brown says there is also a growing trend by purchasers to acquire 24 carat gold from smaller gold shops in rural areas in countries such as Turkey and China. Here, gold is serving as a form of savings for many buyers. (Also in China, pure gold figurines have become popular among local consumers.) Areas such as Turkey have also lifted restrictions on the gold market. These small caches of gold are not likely to reappear until these countries become more Westernized and individuals use their savings to increase their standard of living, Brown reasons.

In effect, the move by non-traditional buyers to use gold as savings is in direct reverse to what is seen in many industrialized nations where “dishoarding” is occurring, according to Brown. Japan, where investors have been hit by falling land prices, are freeing up gold to prop up other assets. The move is not unlike Canada’s central government, which has been releasing gold on to the market amidst sharp criticism from dealers who see it increasing the bearish attitude amongst investors.

“There was earlier this year, a release of reserves by the Belgium central bank and while the sale was conducted to minimize the effect on the market — unlike Canada — it did create some shock in the market,” says Brown. Steeves says Canadian gold producers and mining associations have all asked the Canadian government to stem the monthly flow of gold onto international markets.

Continued soft world gold prices (the l992 high was $359.60 per oz., the low was $335.20 and the average was $345.65) has B.C.-based gold producers practising tight cost controls. Placer Dome (TSE), which operate 14 properties, had an average cash production cost of US$188 per oz. for the 9-month period, says spokesman Hugh Leggatt. That compares with US$l79 for the third quarter, surpassing the previous quarter record of US$l82 set in the fourth quarter of l987.

“We can’t control gold prices,” says Leggatt, ” But, we can control the cost of the product, so that’s what we have concentrated on.”

While operating and process improvements are cited as enhancing mill throughput, improving grade control during mining, enhancing recoveries and lowering employment levels, the company has the benefit of low-cost mines. In its third-quarter report Placer Dome says: “Approximately three-quarters of the increase in gold production in l992, over the l991 period, has come from the low-cost mines in Papua New Guinea and Chile which in aggregate have contributed 40% of l992 consolidated gold production to date.” Leggatt says Placer Dome has also been able to hedge to achieve an increased price for gold. “In the last 9-month period, our average realized price is US$372 per oz., whereas the spot price for gold has been an average of US$346 for the first nine months of l992,” he says.

Chief Financial Officer Christopher A. Serin of Royal Oak Mines (TSE) says it is deceptive to look at only gold prices in U.S. dollars without taking into consideration the strong U.S. dollar internationally. As a result, it has weakened the position of the Canadian dollar during the past year and resulted in some cost advantages for Canadian producers “versus the operator in the States,” he says.

Royal Oak’s third-quarter results indicate a US$309 cost of production per oz. gold compared with US$330 the previous year. Cost was lowered to US$301 in the 3-month period ended Sept. 30. Royal Oak increased production during the 9-month period from l4l,738 oz. in l991 to 164,006 in l992. Serin says there is a continued negative perception regarding gold investments as gold prices recently dropped by $l0 to $33O.

Lower gold prices and production also affected Teck, which reported that while all its mines operated profitably, lower gold prices in the past nine months (US$346 per oz.) plus reduced production (299,000 oz. compared with 340,000 for the same period in l991) resulted in overall lower cash flows. Steeves says Teck had anticipated the reduced production as grades dropped. The price drop has yet to hurt margins, Steeves says. “We are one of the lowest-cost producers in the world.”