Gold bulls like volatility despite price decline

Optimistic analysts surveyed by The Northern Miner during the last gold rally (T.N.M., July 20/92) are maintaining bullish forecasts even in the wake of a recent decline that lopped US$13 off the gold price and left the yellow metal struggling to regain the US$340-per-oz. level.

“What seems to be happening is that there is more central bank selling than I anticipated,” says Pierre Lassonde, president of Franco-Nevada Mining (TSE) and an authority on the gold price. “If anything, this trend reversal might postpone the US$365-US$375 scenario (Lassonde’s original year-end forecast) into the spring.”

Lassonde says large-scale selling from an unknown source put pressure on the gold price in recent weeks. Coupled with producer selling in South Africa and Australia, as well as economic uncertainty worldwide, the dumping sent gold into a tailspin.

Analysts also attribute the latest downturn in precious metal prices to a widespread selloff of commodity-based funds after the Commodity Research Bureau’s index fell below the psychological floor of 200 points on August 12. Falling commodity prices are a sign that inflation — a traditionally positive develpment for gold — is under control.

Gold dropped sharply in the first half of August after a gradual run-up from a 6-year low of US$335 in May to US$359.60 at the end of July. At presstime, the yellow metal was trading at US$338.60.

“The run-up in June and July was largely a reflection of the fluctuations in the U.S. dollar,” says Burns Fry’s Felix Freeman. Investor sales, he says, were triggered by a generally weak August market, producer sales, and a subdued and short-lived strike in South Africa. In a thin summer market, the sell orders had a disproportionately negative effect on gold. Freeman, who coauthored a bullish June report entitled Bullion and Gold Equities Outlook, expects gold to resume trading in the US$355-US$370 range by the end of October.

And despite the recent price setback, both analysts are encouraged by signs that short-term players have returned to the gold market. “The one good thing is that we’re seeing more volatility,” says Lassonde. He says the price swings indicate that gold is resuming its traditional role as an investment vehicle.

Other developments, including strengthening demand from the jewelry sector, declining production and the recent rise in the price of gold in Japanese currency, are also positive, some analysts contend.

But unless global liquidity strengthens and European central banks lower their interest rates, the upside potential for the yellow metal is limited, says The Bank Credit Analyst.

“German monetary policy remains the key force working against gold because it is squeezing global liquidity and maintaining high real interest rates which undermine gold’s allure.”