Gold Price May Rebound, Some Analysts Say
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Jul. 12 (The Denver Post/KRTBN)--Oh, London is a fine town, A very famous city,
Where all the streetsare paved with gold, And all the maidens pretty.
-- English playwright George Colman, 1808
That gilded pavement in London no longer carries quite the same glitter.
Following the Bank of England"s sale last week of 25 metric tons of gold, prices fell to a 20-year low -- $256 an ounce, rising slightly to close at $257.70 Friday. Gold once traded as high as $834 an ounce in 1980.
How low can it go? By many accounts, not much lower.
Adjusted for inflation, gold is cheaper now than its value of $35 an ounce in 1947. Investors stashing cash under a mattress would have fared far better than holding gold over the past 20 years.
With that kind of performance, forecasting better days for gold is not a great leap.
Then again, gold prices have defied laws of supply and demand for so long that gold confounds rational economic analysis.
But some analysts say that a combination of widely disparate factors -- the Y2K scare, an over valued stock market, economic instability in Asia and the shutdown of numerous gold mines -- may point to a rebound for gold.
"At some point, the price has to catapult, and go up by multiples," said Michael Kosares, president of Centennial Precious Metals in Denver. "The question is, when?"
As the site of the great gold rush of 1859, Colorado has a significant interest in the answer to that question. Here"s why:
-- Even though no one is mining gold in substantial quantities in the state, several gold-mining companies are based here, including Newmont Mining, the world"s second-largest gold producer.
-- Kosares" Centennial Precious Metals is one of the nation"s largest brokers of gold coins, and his book "The ABCs of Gold Investing" and his company Web site are widely followed by gold investors.
-- The gold fund at Denver-based Invesco mutual funds has performed better than many of its peers -- albeit faint praise in the lackluster gold-fund sector.
Officials at each of the Colorado entities share a common mindset: a hope and expectation of higher gold prices, tempered by the realization that gold has disappointed before and will probably disappoint again.
"I"m not going to sit here and tell you I"m bullish on gold," said John Segner, vice president and portfolio manager of the Invesco gold fund. "But I"m also not sure what the downside could be," he said, referring to supply and demand fundamentals that point to a rebound for gold. "I just don"t think you can find significant downside."
Invesco Gold was down 1.6 percent in the first half of 1999, compared with a 3 percent average decline for the nation"s 30 major gold funds tracked by Lipper Inc.
Segner"s strategy has been to invest in gold-mining companies that have low production costs -- firms that can mine gold at costs lower than they can sell it.
Low-cost mines tend to be those in which gold ore can be obtained without digging too far or too deeply.
However, gold-mining firms are increasingly having trouble finding low-cost gold.
Some 20 percent of the world"s unmined gold would cost more than $270 an ounce to produce, effectively making it untouchable at current prices.
About half of all gold would cost more than $200 an ounce to produce. At those costs, it"s perilously close to uneconomic.
South Africa"s gold generally carries high production costs. As a result, five South African mines last week asked the government for permission to lay off 11,700 miners.
In addition, one of the country"s oldest firms, East Rand Proprietary Mines, announced it would move to liquidate because it can no longer make a profit with gold at its current price. The liquidation would leave 5,000 unemployed miners, many from impoverished neighboring countries.
For Newmont Mining, gold production costs are substantially lower than for most South African mines, but not low enough to insulate Newmont from the upsidedown market.
On average, Newmont mines its gold at a basic cost of $181 an ounce. Including depreciation and reclamation, the cost reaches $230. But when all other expenses are factored, including administrative overhead, interest on debt and office space, Newmont"s costs rise to $275 an ounce -- well above current market prices.
"Gold prices have simply reached the point where mining can"t be sustained," said Jack Morris, vice president of corporate relations at Newmont Mining. "The price is below the economic point of viability."
Ultimately, prices so low that mining becomes unfeasible will work in favor of the gold market, if not for gold miners.
That"s because demand for gold -- mostly from jewelry fabricators -- has risen steadily over the years, while supplies of mined gold have not kept pace.
As more mines close, the imbalance between supply and demand will grow. Under normal economic conditions, such an imbalance would cause prices to rise.
Yet the wild card in the gold market has been the selling of gold reserves by the governments of several nations, such as the United Kingdom"s recent decision to sell more than half of its reserves, or about 125 tons over the next year.
The British Treasury said it was selling gold to buy U.S. dollars, Japanese yen and the European Union"s new euro currency to create a more balanced cash reserve.
Other nations that have sold gold include Argentina, Australia, Belgium, Canada and the Netherlands. Switzerland and the International Monetary Fund also have floated proposals to sell gold.
The government sales have forced gold prices down, when diminished supply and higher demand otherwise would have pushed prices up.
Many experts, however, say that the psychological effect of central bank selling has been disproportionately devastating to the market compared to its real economic impact. They note that the sales represent only a small portion of total gold supply.
"That has artificially held prices down," said Kosares of Centennial Precious Metals. "The market psychology created by those sales has taken its toll." Also, analysts say, the world"s largest holders of gold reserves -- the United States, Germany and France -- are not sellers.
Another factor holding gold prices down are investors who take "short" positions in gold, betting that prices will continue to drop. Short investors borrow gold and then sell it at current prices, hoping to buy back the gold when prices are lower.
Morris of Newmont Mining envisions a scenario that could cause gold to rebound.
First, he said, mining cutbacks will reduce supply enough to push prices higher.
Then, as prices rise, holders of short positions will need to buy gold to stem their losses. The demand created by their buying will force additional price hikes.
As the prices rise, mining companies and gold-sector mutual funds will generate profits for investors.
By Steve Raabe
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(c) 1999, The Denver Post. Distributed by Knight Ridder/Tribune Business News. NEM, END!A$16?DP-GOLD |
