Selling pressures push down gold price

Gold: Prices of the yellow metal continue to retreat under mild selling pressures to the US$340-per-oz. level. Rumored sales by “large sellers” added little to the movement. While traditional uses for gold continue apace, speculators appear to have moved aside for now.

On the supply side, producers are coping with new approaches to mining. An important reason for the increase in supply in the face of lower prices is the changing economics of gold. The ability to process new types of ore and tailings with new technology is permitting the development of large, low-grade deposits whose production costs fall in the range of US$150-250 per oz., depending on other metal credits.

The “1992 project survey” of Engineering and Mining Journal lists US$42 billion worth of planned world mining projects, of which 38% of the capital is to be invested in projects in North and South America. The majority of the gold projects, mostly in the U.S., valued at US$2.4 billion, are of the large, low-grade variety.

Because of the homogeneous nature of these ores and an ability to plan annual production and costs with some certainty, producers can more easily arrange financing either with traditional lenders or through metal loans and hedging programs. The metal price risk can be reduced to whatever level the venture partners need since their costs are well below current prices. Gold prices have bottomed twice in the last two years (in the US$350 range) and have now broken this resistance level. The lower prices and the end of the current recession should improve industrial and jewelry consumption which has been surprisingly steady.

Any interruption in supplies from South Africa and Russia would again add a speculative element and higher prices.

Silver

Silver prices have continued their sideways movement for more than a year, trading around US$4 per oz. Seldom mined by itself, silver is mainly produced with other metals, particularly gold and base metals. Silver consumers have enjoyed relatively low stable prices for many years and this development has improved annual consumption, which is reported to exceed estimated annual production of 15,000 tonnes. However, inventories are still plentiful and in the short-term prices would only rise significantly in sympathy with a rebound in gold.

Platinum

The decline in world auto sales and economic activity in Japan is reflected in lower demand and prices for platinum, which is currently trading in the US$355-per-oz. range. There are also reports that car manufacturers are testing substitute catalyst alloys which would require less metal in each unit.

Annually, auto catalyst use accounts for some 40% of the world production of 3.7 million oz. An amazing 35-40% is manufactured into jewelry for Japanese consumers. The balance is used in a variety of industrial and chemical processes and until recently about 10% went into investors hands each year. With the European Community beginning to legislate auto exhaust emission levels, consumption should continue to grow at historical rates. Mines in South Africa and the former USSR nations each account for some 40-45% of Western world primary metal needs. Any serious interruption in deliveries would cause a rapid run-up in prices.

Palladium

Another platinum group metal, palladium has wide industrial use. Largest is in the electrical industry, followed by dental, auto catalyst and chemicals. Like platinum, demand and prices are down because of the worldwide recession. Since there are few substitutes, the outlook is favorable when recessionary levels abate.

Some palladium is produced as a byproduct of the mining and refining of nickel, copper and cobalt ores. The largest producers are in South Africa and the former USSR nations. Prices appear to have bottomed in the US$80-90-per-oz. range.

Jack Dupuis is a minerals marketing consultant based in Thornhill, Ont.