Realman commeth for the gold bugs <nfg>
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bloomberg.com
Top Financial News
Sun, 13 Jun 1999, 6:29am EDT
Bank Gold Sales to Equal at Least Nine Months Output, Pushing Prices Down
By Mark Deen
Bank Gold Sales to Push Prices Lower, Crimp Profits (Update1)
(Adds comments from G-7 in 2nd paragraph and from 18th)
London, June 13 (Bloomberg) -- Central banks and the IMF are
likely to sell gold equivalent to at least nine months' global
output within five years, squeezing mining companies profits and
pushing prices below current 20-year lows, analysts said.
Gold has dropped 10 percent in the five weeks since the U.K.
Treasury joined a growing list of government bodies, including
Swiss National Bank and the International Monetary Fund, that
have sold or are considering selling much of their gold. Finance
Ministers of the Group of Seven leading industrial countries
yesterday backed the IMF plan to sell up to 10 million ounces.
Investors are concerned because more than a decade's global
mine output is in government vaults. Gold for immediate delivery,
which closed in London interbank trade on Friday at $260.65 an
ounce, fell to a 20-year low of $257.15 an ounce last week.
''I'm convinced all of these sales are going to happen,''
said Tony Warwick-Ching, an analyst at Virtual Metals Consulting
Ltd. ''The keepers of the buffer stock are stepping back --prices
haven't yet seen the floor.''
The U.K., the world's ninth-largest gold holder, said May 7
that it plans to unload more than half of its 715-metric-ton gold
reserves in the next three to five years, starting with an
auction of 25 tons July 6. In April, Swiss voters approved a
proposal to break a 100-year link between the franc and gold,
paving the way for the government to sell 1,300 tons. Switzerland
holds the fourth-largest stocks of above-ground gold.
Australia and Argentina both sold more than half their
reserves in 1997.
The proposed government sales are because other investments,
such as government bonds, give a better rate of return, analysts
said. U.K. Chancellor of the Exchequer Gordon Brown said Friday
the decision to sell was merely ''technical.''
Over the last year, the average interest earned on lending
gold for a month was 0.9 percent, compared with an average return
of 4.3 percent earned by one-month U.S. Treasury bills.
IMF Sale
Meanwhile the U.S., Canada, Japan, Britain and France have
also said this year that they support a plan for the IMF to sell
between 5 and 10 million ounces of bullion to relieve the debt
burdens of the world's poorest nations.
For mining companies with high production costs, the decline
of gold threatens their existence. A 22-percent drop in prices in
1997, as Australia and Argentina sold, prompted cost cutting and
consolidation. Further such measures could prove difficult,
analysts said.
''The producers have used up much of the easy fat cutting
and are now much closer to the bread line,'' Warwick-Ching said.
South Africa, the world's largest gold producer, has the
highest average costs of production the top four producing
countries. Costs averaged $273 an ounce in 1998, according to
London-based Gold Fields Mineral Services, compared with an
average price of $294 an ounce. With average prices this month of
$264, many producers are relying on forward sales of their
output, made when prices were higher, to protect them from
losses. If prices remain below cost when those forward sales run
out, mines could close.
Miners' Plea
This year's slump, which pushed gold to its lowest since
1973 when adjusted for inflation, is likely to garner renewed
calls from mining executives and bankers attending a gold
conference in London tomorrow for government sales to be spread
over a long-enough time to minimize the decline in prices.
''The most important question is still whether there is a
way for central bankers to sell that doesn't destroy the gold
market, '' said Kamal Naqvi, an analyst at Macquarie Bank.
Yet central bankers and politicians around the world, are
unable to agree on the sale of gold reserves.
''How do you do it? It's very difficult,'' said Warwick-
Ching ''It means you'd have to overcome things like a veto from
the French, who have always opposed sales.''
Where the U.K. was able to decide unilaterally to sell more
than half of its 715-ton reserve, the German government must get
the approval of its central bank to support sales by the
International Monetary Fund, and the Swiss have just held the
first of what may prove to be a series of referendums on gold
sales.
And Germany's Bundesbank is voicing its concern about the
market impact of the government gold sales.
German Concern
Selling gold to finance debt relief has the 'unpleasant'
side effects of sinking prices and thereby 'drastically' reducing
the incomes of some of the world's poorest countries, Bundesbank
council member Ernst Welteke said.
Welteke, set to replace Hans Tietmeyer as Bundesbank
president and European Central Bank council member in September,
said conditions must be placed on general debt relief, adding the
democratic practices of countries receiving aid and their regard
to human rights must be taken into consideration.
''One also has to ask oneself, how the ever increasing
relief of debt is to be financed,'' said Welteke in a pre-release
of an interview with German radio station Hessischer Rundfunk.
The German central bank has been wary of the IMF's plan,
maintaining that gold should be held in reserve by the IMF in
case of a future financial crisis. The IMF has been considering a
gold sale since September 1996, when it started a program to help
poor countries such as Bolivia and Burkina Faso to pay off their
debts.
In the meantime, prices are set to keep falling, analysts
say.
''For me, $250 an ounce seems likely in the next few weeks,
but there is certainly potential for prices to go below that in
the longer term,'' Naqvi said.
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