Gold market in short supply: Shearson Lehman Hutton

In its Annual Review of the World Gold Industry 1989, Shearson says this year’s gold market will exhibit a period of fragile stability. While western investors will remain uninterested, the tendency of producers to sell into strength will keep a cap on values.

The average London gold price predicted for the year is $410(US) per year, down from $437 in 1988 and $446 two year ago, but well above the 1986 average of $345.

According to Shearson, there is a minor possibility of a speculative shake-out during the first half of the year to see a brief test of $360. A reasonably long period in the $380-$420 range may be expected because of an ever-increasing tendency by market operators to take short-term profits. Eventually, the tightness in the market will push the price into the $425-$450 range.

The precious metal is not expected to trade above $450 for any sustained period unless inflation starts to run rampant. Investment demand

During 1988, strong investment demand from the Far East and, increasingly, Latin America, the Mid-East and the Asian sub-continent, meant the industrialized west was called upon to disinvest, the Shearson researchers write.

“This it did, and was in most respects happy to do so, as the prevailing economic and financial forces all militated against investment in gold either as an inflation or as an uncertainty hedge,” says the investment dealer.

“The market duly weakened because while the strong demand from developing nations was good enough to put a floor under the market, it was not so strong, in the face of heavy supply levels, to drive prices higher. This would have needed buying interest from money managers, investors and speculators in the west, rather than their readiness to sell.”

In 1989, the picture will not be altogether different. In the west as a whole, the investor will be called upon to absorb about 50 tonnes, or 12% more than last year, Shearson says. Investment demand from the above regions can afford to slip, on a physical basis, by at least 15% this year before they stop acting as a drain on European and North American investment holdings. The key question, Shearson says, is how much more is the west willing or able to sell?

The pivotal factor determining sentiment this year will be the determination and ability of the western governments to keep inflation under control. No bull trend

Shearson researchers have identified 1988 as the first year since 1968, when gold was released from its $35 peg, that prices did not exhibit a bull trend against a background of rising industrial growth and accelerating inflation.

“This does not, as yet, suggest gold’s role as an inflation hedge is at an end because the market, as the servant of investors’ fears, responds initially to inflationary expectations,” writes Shearson, adding the gold market will face a dilemma again this year. Shearson foresees the “official sector,” or the central banking activities of nations, cutting back gold purchases this year; it is estimated net purchases last year, with Taiwan leading the way, amounted to 209 tonnes.

Gold loans are expected to be an important feature of the market again this year; best estimates have 150 tonnes gold entering the market last year in the form of loans.

A 12.5% increase in non-communist-world mine output, to 1684.7 tonnes, is projected for 1989, up from 1497.2 tonnes last year. Recent growth in output by Australia and North America is not expected to be sustained. Foreign exchange value

And, with South Africa experiencing declining grades and rising costs, Shearson says the focus for expansion is switching to Latin America, Africa and the Pacific Rim. “Many governments in these areas are realizing the value of gold as a foreign exchange earner, and opening their doors to overseas investment accordingly,” writes Shearson.

Rising production costs and a gold price which continues to hang in under $400 threaten profit margins, but Shearson points out forward selling by producers has tended to counteract this effect. Cash production costs of $215(US) per oz for the United States, $216 for Canada, $244 for Australia and $280 for South Africa are listed.

On the demand side, jewelry boomed in 1988 as a reflection of growing wealth and a similar scenario is expected this year. Strengthening demand from consumers in Japan and other nations of the Far East is anticipated.

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