Gold’s rise may signal end to the long bear market

The price of gold rocketed to a high of US$385 per oz. on May 19 from a low in March of about $326. At presstime, the price had sagged, presumably as a result of profit-taking, to $373.

Peter Allen, president and chief executive officer of Lac Minerals, told The Northern Miner the rally has been fueled by technical considerations, such as a generally sluggish economy, low interest rates, and so on. But, as well, he feels a “psychological shift” might have occurred in the currency markets.

“There has been a re-evaluation of the value of paper money,” he said, specifically mentioning the Deutsche Mark, the yen and the American dollar. With major currencies out of favor, investors would be moving toward gold. A second point, said Allen, is “a perceived end to the deflationary scare,” which saw the value of real estate and financial assets around the world drop significantly.

“But I don’t think the (gold) market is fooled into believing there’s going to be any major inflation just yet,” he added.

Pierre Lassonde, president and chief operating officer of Franco Nevada, a company with gold royalties on the huge Goldstrike mine in Nevada, among others, agrees that inflationary worries are not moving this market. Strong physical demand, particularly in Southeast Asia, has supported the price. And as investors moved in during late 1992 and early 1993, “fund managers in Europe and elsewhere who have not touched gold in 10 years saw it (buying bullion or its derivatives) as a profitable move.”

What has some observers surprised is that the predictable rally killers — producer hedging and central bank selling — have not been evident. Gregory Wilkins, chief financial officer of American Barrick, said producers seem to be adopting a wait-and-see attitude.

“They may be saying `let’s take advantage of what the market will give us,'” he said. “Maybe the banks are feeling the same way.” Barrick’s production is hedged to 1995 at a minimum average price of $400.

The rally, he added, may be fragile, although he did not rule out the possibility that this may be the long-awaited turn in the bear market. But whatever it may be, it “should breathe fresh air into the gold industry.” Lassonde was hestitant to predict where the price might eventually settle, though $400 was not out of the question.

“When gold starts to run, you never know how high it can go.” Allen also warned of its volatility. “Gold is peculiar; it has the type of volatility you can’t pin down.”

Nevertheless, Lac seems to have seen the rally coming. In January, it closed out its spot deferred contracts (which are a firm commitment to deliver gold at some point in the future but not necessarily at the maturity date of the contract). Those contracts covered its 1994-95 production, said Michael Kennedy, Lac’s treasurer.

Having closed out its spot deferreds, Lac is not locked in to a price that might be well below spot in a year or two. But the company did buy options as “disaster insurance,” should the gold rally prove a false start. So far, it has not. Lac has also “unhedged” its 1993 production.

“We’ve been smiling ever since,” said Smith.