Gold crash seen eroding
monetary backstop role
06:03 a.m. May 27, 1999 Eastern
By Michael Byrnes
SYDNEY, May 27 (Reuters) -
Gold's price crash has signalled the
effective end of the metal's
traditional role as a reserve currency
and left it poised between a market
bounce and a bloodbath, Australian
bullion dealers said on Thursday.
The metal's price collapse to 20
year lows overnight, which
accelerated in Asian/Australian
trading on Thursday, had left the
market in disarray, prompting both
buying and selling by producers and
raising the prospect of further sales
by funds and central banks, they
said.
''Australian gold producers are in
shock,'' one dealer said.
Decimation of confidence in the gold
market was highlighted by the price
collapse running contrary to healthy
Asian demand for the metal, which
was outstripping mine supply, they
said.
Australia's largest bullion dealer
Macquarie Bank sees US$266 as
the next support line for gold after
the metal's crash through $270 in
recent days.
''Prices are at reasonably pivotal
levels and if selling accelerates ... it's
not going to be pretty,'' one dealer
said.
A fundamental shift in the world
bullion market over the past 18
months had ended gold's role as an
alternative to currencies, Macquarie
Bank bullion dealer John Israel said.
Gold's latest price slump, by more
than $20 an ounce since May 7,
was triggered by Britain's
announcement that it planned to sell
more than half of its 715 tonnes of
gold reserves.
The crash was worsened by Bank
of England Governor Eddie
George's statement on Tuesday that
the decision to sell was a
''straightforward portfolio decision.''
Australian dealers said the market
took take this to mean George saw
gold as a ''lousy investment.''
The first instalment of Bank of
England sales at the beginning of
July, and the price response, would
give a better indication of the state
of the market, Israel said.
But relatively good physical demand
from Asia was not enough to offset
negative sentiment over central bank
selling, he said.
Gold's price has plunged despite the
fact that world demand, led by
India, in 1998 amounted to 3,770
tonnes against Western world mine
supply of 2,530 tonnes, according
to AME Mineral Economics Ltd.
Supply was topped up by 1,000
tonnes reclaimed scrap gold, largely
the result of east Asian dishoarding
triggered by the regional economic
crisis.
But the market has ignored the
demand gap, seeing only the
estimated 35,000 tonnes of bullion
sitting in central bank vaults.
The world's largest gold hoarder,
the United States, with 8,138 tonnes
of official reserves, is not a seller,
according to a May 20 statement by
Treasury Secretary Robert Rubin.
But with Switzerland likely to unload
half its holding of 2,600 tonnes, the
IMF considering selling about 300
tonnes for debt relief for poor
nations and formation of the
European Central Bank leaving
about 12,000 tonnes of gold in
European Union national central
banks with a limited monetary role,
the overhang is too great for
markets to bear.
Gavin Wendt, gold analyst at broker
Intersuisse Ltd, doesn't think gold's
monetary role is over, but sees no
price turnaround.
''I think it still has a vital role to
play, but its no use saying that ...
unfortunately it's not a great
investment.''
Wendt sees the gold price settling
eventually in a range of $270-$275,
with mine closures at lower prices
reducing supply sufficiently to push
prices back up.
''If it does fall to $250 there's going
to be so many producers shutting
down mines, it's going to be
unsustainable.''
Copyright 1999 Reuters Limited. |
