Gold’s future impossible to predict — Long shots for increase include dismal greenback, bad banks

Anyone counting on a resurgence in the price of gold in 1999 may want to reconsider. London-based research firm Gold Fields Mineral Services predicts the yellow metal will continue to trade between US$270 and $310 per oz. until mid-year, and its analysis offers little hope for the following six months.

“We don’t really see any compelling reason why gold should be able to break out of either extreme,” Philip Klapwijk, Gold Field’s managing director, told a gathering of about 200 analysts and investors at Toronto’s Sheraton Centre. “What might cause a breakout on the upside would be financial instability serious enough to call into question the credit worthiness of banks and financial institutions . . . or a dramatic collapse in the U.S. dollar. Conversely, there is still a distinct possibility that gold could move even lower if the world falls into recession, in association with major devaluations in China and India.”

The bearish outlook follows a dismal year, during which gold averaged just US$294 per oz., its lowest level in two decades. Chief causes of the decline include an 80% increase in recycled gold from East Asia for the year and an 8% rise in gold sales by central banks, amounting to 437 tonnes. Overall, supply declined by less than 2% in 1998.

Total fabrication demand declined by 3% in 1998, reflecting a dismal 2% growth in world gross domestic product. The International Monetary Fund predicts an even further slowdown this year, to 1.8%. Such a decline would have an adverse effect on jewelry and industrial demand. Klapwijk said inflation is unlikely to rear its head in such an environment.

Meanwhile, however, gold production from mines continues to increase, having risen by 57 tonnes in 1998 to a new record of 2,529 tonnes. Producers overcame the lower spot prices by reducing their cash costs, with the Western World average dropping to US$191 per oz. by the fourth quarter. Klapwijk noted, however, that much of the reduction arose from currency devaluation and short-term solutions, such as the cutting of exploration and development expenditures and mining of high-grade blocks.