Gold moves again

Hardly a few days old, the new year picked up where the old one left off. Gold fever struck investors as bullion prices broke through the US$395-per-oz. resistance level. And gold seems poised to breach what bullion analysts call the “psychologically important” plateau of $US400 per oz.

However, opinion is divided on its prospects for the remainder of 1994. Egizio Bianchini, gold analyst with Nesbitt Thomson, is an optimist. “There is a very good possibility gold will hit US$450 an oz. sometime over the next year,” he said.

He argues there is a supply deficit in the supply-demand equation. Previous big sellers of the yellow metal, including central banks such as the Bank of Canada, sold gold aggressively over the past few years. As a result, current inventories are low. Also, mine production has remained relatively stable, thereby adding to the supply deficit.

Another argument supporting Bianchini’s claim is the current instability among world currencies.

When asked about the future price of gold within the year, Bianchini commented: “There’s no question gold is on the uptrend. We see US$450 gold as being reasonable and possibly $US500 as an overshoot. For gold to go beyond this, there must be a real threat of inflation and stronger uncertainty with regard to currency stability.”

Barry Allan, gold analyst with Deacon Barclays de Zoete Wedd, is not as optimistic about the price. He forecasts an average price of US$375 an ounce and expects there will be great volatility in the gold price. His reasons are two-fold. First, he says the supply is in balance with demand. “The underpinning factor for the gold price is that there will be no rise in gold production or fabrication demand,” he said.

Another point to be considered is the source of the current rally. He added that “the investor component is the main force behind the current rally. With this group, physical delivery is not required and speculation does increase the price. More important, however, is that the investor component also increases the volatility. Speculators can withdraw their support, thereby causing the price to fall.”

David James, mining analyst with Richardson Greenshields, is also somewhat bearish on price. “Although we’re knocking on US$400 an ounce, I would be surprised if gold makes it through the $US407 barrier for any length of time.” James forecasts an average price of around $US375 per oz. In addition to the withdrawal of the investor component support, James sights the lack of hedging done by the senior gold producers as a reason for his outlook. “Companies such as Lac and Echo Bay have not, as of last September, done any hedging.” (By hedging, companies effectively put up a barrier and cap the price of gold.)