Gold reacting to lack of speculative demand

As peace seemed imminent in the Persian Gulf during the week ended Feb.26, both gold bullion and oil prices drifted lower, taking several TSE-listed gold mining stocks along with them. By presstime, gold bullion had dropped to a low of US$357 per oz. in London, down from US$391 per oz. at the beginning of January. Oil prices for April delivery also fell to a low of US$18 per barrel, although some analysts were predicting a return to the US$20 level.

Declining oil prices generally tend to exert downward pressure on gold, although the 1985 collapse in oil prices didn’t prevent gold from rising. In recent months, gold’s behavior has puzzled many analysts since it didn’t react to the leap in oil prices caused by the Gulf conflict.

“Not only has the speculative appeal of gold diminished, so has the desire to hold it as insurance,” said Robert Weinberg, a gold analyst for London-based James Capel.

Weinberg recently predicted that 1991’s average price for the yellow metal could be around US$380 per oz. “I suspect that we may find gold dipping down to US$340, perhaps lower,” he said. “I also have a horrible suspicion that we have already seen the high for the year.”

One major factor underlying gold’s refusal to rise in the wake of recent events is the fact that market speculators have found more exciting games to play.

“Speculative demand is the stuff of which raging bull markets are born, but I believe there will be less of that in the decade ahead,” said Weinberg. Gold’s dominant role in the 1990s is likely to be that of a commodity with the market influenced mainly by jewelry fabricators and diminishing supplies, he explained.

He also points out that exploration budgets are being severely trimmed as senior mining companies experience dwindling cash flow. “Many companies will soon face the problem of maintaining existing ore reserves, let alone increasing them,” he added. “An increasing number of mines will face closure at current prices.”

According to international gold mining analysts at the London-based firm of Carr Kitcat & Aitken, positive fundamentals underpin the long-term outlook for gold.

They said that although gold’s reaction to the political and economic turbulence of the past 12-24 months has been disappointing, the longer-term outlook is not completely bleak.

“Investors have clearly reassessed their view of gold as a store of value, given the host of other financial hedging instruments now available,” said Carr. The analysts believe this reflects a different, although no less important, gold market for the 1990s, which is driven less by speculative activity and perhaps more by fundamental concerns.

Although in the short term speculative interest and market sentiment are important factors, non-investment demand still accounts for more than 80% of total annual gold consumption, explained Carr.

When considering the longer-term outlook for gold, it is vital to step outside the short-term constraints imposed by the Gulf conflict and look more closely at the supply-demand picture. On that front, Carr’s analysts predict the western world’s uninterrupted gold production growth since the late 1970s is about to come to an end.