Gold bugs herald start to latest bull market

Stirred by signs that a new bull market may lie just around the corner, gold bugs are beginning to emerge from a long hibernation.

“We are witnessing an end of the 5-year and 12-year bear market for gold,” Pierre Lassonde, president of Franco-Nevada Mining (TSE) and a well-known gold pundit, said in a recent report in reference to price peaks in 1987 and 1980. “A new golden bull will emerge, timid and nervous at first but strengthening as time goes by.”

So far, Lassonde’s predictions appear to be on track. After reaching a 6-year low of US$335 per oz. in May, gold has been creeping slowly upward. By presstime, the yellow metal had reached US$350.95.

But according to Lassonde’s theory, the recent rally is only the beginning. He says the real bull will emerge only as the “massive reflation effort now under way in the G-7 countries” gathers steam.

“I would expect gold to bounce back up to the US$365-375 level before year-end but be subject to a lot of producer selling at these levels as the miners try to catch what they believe is the last train leaving the station. Once that is out of the way, gold should move higher,” he said. But more cautious optimists say the recent break in the gold price is partially a function of a weak U.S. dollar. “We would want to see the price turn in all currencies before concluding that a true rally had started,” says securities firm Burns Fry in its latest outlook for bullion and gold equities. In its July edition, The Bank Credit Analyst further warns that global liquidity trends are not yet strong enough to warrant calls for a bull market. Nevertheless, citing flat-to-declining supply and increasing demand from the jewelry sector, Burns Fry is forecasting an average price of US$360 in 1992, jumping to US$400 in 1993 and US$420 in 1994. And The Bank Credit Analyst tells observers to “be on guard for signs of change in the coming months.” The potential for supply disruptions from politically heated South Africa and the former Soviet Union is also positive for gold. Those two regions were among the top producers of the yellow metal in 1991, with outputs of 601 tonnes and 242 tonnes, respectively.

The shift in market sentiment toward gold has been swift. Just a few months ago, many experts were forecasting further price declines to US$325 and in some cases to less than US$300. Newmont Mining’s (TSE) purchase of 375,000 oz. in mid-May marked the turning of the tide.

This unexpected move was taken, said President Gordon Parker, to demonstrate to investors that US$335.95 (the price Newmont paid) is just about as low as gold is likely to go.

But not all analysts are forecasting a bright future for bullion. Repeated selling by the world’s central banks, which collectively own an estimated 38,500 tons of gold, will hold price increases to below 3% in the coming years, says J.P. Morgan Securities.

“These banks will continue to supply liquidity to the gold markets periodically, when good opportunities arise,” says the New York-based broker. “In this scenario, we expect gold price increases to lag inflation possibly for the rest of the decade.”