Gold price drop seen as simply an `aberration’

Gold analysts are calling last week’s unexpected US$23 tumble in the price of bullion a “short- term aberration” caused by a single gold sale in Europe and other significant sales by investors in Tokyo. The yellow metal’s abrupt drop in price to US$370.25 per oz. from US$393.50 in London on March 26 may trigger a new round of buying opportunities for investors interested in picking up blue chip gold mining stocks at bargain prices.

Most North American gold mining companies have average cash operating costs of around US$215 per oz. Meanwhile, South African mines, which turn out nearly 40% of the world’s gold, have cash costs closer to US$300 per oz.

According to Ron Coll, a gold equities analyst with McLean McCarthy, the bullion price is not likely to fall much below US$360 per oz. — a support level tested at least five times last year.

He predicts the gold price will gradually make its way back up over the US$400-per-oz. mark later this year.

“Gold will have a tough time penetrating below the magic US$360 level,” says Coll, but he adds that forecasting bullion prices is difficult because numerous factors, including emotion, influence the market.

“The recent price volatility underlines the extremely fragile nature of the gold market,” he says. “The U.S. dollar has also been very strong lately and that’s very bad for gold, too.”

He attributes last month’s price plunge to two significant international events — substantial gold selling in Tokyo to cover margin calls during a stock market crash there, and a 2- to 4-million-oz. gold sale in Europe by Saudi Arabia.

“It (the Saudi sale) was just sloppy trading,” said analyst Rick Cohen at the Toronto office of BBN James Capel. Why a major gold owner would sell into the market in a manner to cause such turmoil remains unclear.

Cohen also saw the gold price recovering to the US$400-level this year, but he added, “Whenever there’s a large gold sale such as this one, you have to expect a price aberration to happen.”

The London and Tokyo sales have apparently combined to create the straw that broke the camel’s back as far as the gold price is concerned.

According to Martin Murenbeeld’s Gold Monitor, there was more gold pouring into the market than normal for March. He estimates that the annualized rate of supply might be about 200 tonnes higher at present than at the same time in recent years.

Surprisingly, bullion’s downward dive comes just as many gold analysts had been predicting higher prices for the metal and were recommending it for superior returns in 1990.

Shearson Lehman Hutton Securities, for example, forecast an average gold price of US$415 per oz. this year, while many other gold bugs have also been flashing buy signals and predicting a bull market for the metal.