Miners Pay Price for Lackluster Gold
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LONDON, Jul 11, 1999 (AP Online via COMTEX) -- Gold"s ancient status as the ultimate store of value is fading in the West, and miners in gold-producing nations are paying the stiffest price.
A global selloff of the metal, hastened by the Bank of England"s auction of some of its reserves last week, has driven gold prices down to their lowest level in a generation, triggering bankruptcies and street protests in South Africa and spreading gloom from Uzbekistan to the United States.
But cheaper gold has its bright side: more lavish dowries -- and happier in-laws -- in India and less expensive jewelry in pay-by-weight gold shops in Asia.
For many of the world"s poorest people, faith in the metal that British economist John Maynard Keynes dismissed as a ""barbarous relic"" remains strong.
If prices continue to slide, unemployment and instability are likely to worsen in gold-producing countries, particularly those with older, deeper mines that are more expensive to operate.
""This is the economics of the madhouse,"" said Haruko Fukuda of the World Gold Council, a London-based group financed by gold-mining companies.
Britain"s financial authorities, Fukuda said, ""have lost sight of the reason for having gold reserves in the first place -- they are the bastion of a nation"s currency -- to be used in the last resort when paper money becomes unacceptable.""
Other analysts aren"t so sure. For them, gold bugs like Fukuda are financial Neanderthals.
""The typical reasons for holding gold, at least in developed countries, don"t exist any more,"" said John Slater, a research economist at Britain"s National Westminster Bank Group.
""Gold does not provide the function that it used to in terms of a hedge against inflation and as a haven against disruption in the world, "" he said.
The current era of low global inflation and peaceful post-Cold War relations have helped topple gold from its historic prominence. So, too, has the increasing popularity of investment alternatives, especially in the stock markets proliferating in rich and poor countries alike.
Gold prices have plunged 11 percent since Britain"s central bank announced in May that it planned to replace much of its gold holdings with higher-yielding assets like U.S. government securities.
In its glory days in 1980, gold traded as high as $875 per troy ounce. Last Friday, the metal was trading in London at $256.80 an ounce. Prices have continued to drift lower as investors anticipate sales of gold by the International Monetary Fund and the central bank of Switzerland.
The divide between supporters and skeptics of gold is sharpest in wealthy nations that don"t depend greatly on earnings from gold sales for their overall prosperity.
But poorer nations with comparatively bigger gold-mining industries, such as Uzbekistan, Mali and Papua New Guinea, have the most to lose from plunging gold prices.
Gold is Uzbekistan"s second-biggest export after cotton, and it accounts for 8 percent of Mali"s gross domestic product.
At current prices, sub-Saharan African countries, excluding South Africa, stand to earn $200 million less than expected this year. The IMF, which aims to help poor countries with proceeds from its own gold sales, will not be able to bridge that gap, according to the World Gold Council.
South Africa, the world"s leading gold producer, has one of the highest average costs of production, at $246 per ounce. One of the country"s oldest firms, East Rand Proprietary Mines, announced plans last week to liquidate because it could no longer make a profit with gold at its current price. The liquidation would cost 5,000 mining jobs.
Other mining companies want to lay off an additional 11,700 workers, a step that prompted a large protest on Thursday in South Africa"s capital, Pretoria.
The country"s economy is in an ""extremely precarious position,"" said David Munro, director of gold banking at The Standard Bank of South Africa Ltd. in Johannesburg.
But cheaper gold is welcome in developing countries that are net importers of the metal. Many Asians and Middle Easterners, wary of shaky banks and political uncertainty, are firm believers in hoarding gold.
Gold jewelry is now more affordable throughout East Asia, where the financial crisis that erupted two years ago in Thailand reinforced a widespread respect for gold as the safest store of value.
In India, a bride"s family typically gives gifts of gold earrings and bangles to the groom"s parents. Anecdotal evidence suggests that demand for gold in India has risen in the last month.
Microchip manufacturers and other industries that use gold as a raw material also should see a slight reduction in costs.
The United States currently holds half of the world"s gold reserves, but Treasury Secretary Robert Rubin has played down the possibility that Washington might sell off some its 8,139 metric tons.
""I do not think the United States should sell its gold, for a whole host of reasons. It is a complicated subject,"" Rubin told the House Banking Committee in May.
Such words could help soothe tempers in gold-mining states such as Nevada, where rumors abound that the Bank of England"s auction was timed to help traders needing cheaper gold.
Still, a resurgence in gold prices seems unlikely in the short-term.
Analysts say it would take an unexpected loss of confidence in the dollar, together with a decision by the British and Swiss central banks to call off their gold sales, to reverse the downward trend.
If prices did start to rise, sales of so-called scrap gold would meet any physical shortfall until mining companies could expand production.
But few signs point to such a scenario.
Copyright 1999 Associated Press, All rights reserved.
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By BRUCE STANLEY |
