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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: IngotWeTrust who wrote (41829)	10/2/1999 1:32:00 PM
From: Alex	Read Replies (1) \| Respond to of 116756

Gold industry regains its lustre By RICHARD SALMONS .......................................................... Sunday 3 October 1999 Investors have put an emphatic end to three years of gloom for the Australian gold industry, bidding up the price of gold by 20 per cent. Gold captured the headlines after a group of 15 European central banks, which hold about half the world's official gold reserves, said they would limit sales over the next five years. That sent gold bullion surging, as well as shares in the 14 companies that make up the Australian Stock Exchange's Gold Index. But investors' optimism is not boundless. By Friday, after a 21 per cent gain since its August lows, gold available for immediate delivery was actually slipping back slightly to trade about US$300 (A$460) an ounce. Gold stocks also fell, because the initial rally had picked up speed as investors who had bet on gold continuing its decline had to buy back into the market to offset their trading positions. Now that was over, investors were casting about for more fundamental reasons to justify a sustained rise in the gold price. One answer is set out by stockbrokers J.B. Were in a study of the long-term price of gold published before last week's rally. It does not attempt to predict short-term price movements, but suggests the "long-term" price - an average over the next twenty years - will return to around US$350 an ounce, the "trigger" price to justify the development of new mine capacity. A strong price would be easily justified in terms of supply and demand based on mine production and the demand for fabrication (mostly jewellery). The problem, as Mr Malcolm Southwood and the other authors of the report note, is that the 33,000 tonnes of gold in central banks' "official holdings" is being rapidly mobilised and outweighing the 4000 tonnes of annual worldwide demand. "We would not suggest for a minute that central banks will sell all of the gold in their vaults," they say. "We do have to consider a scenario, however, whereby central bank holdings are significantly reduced." The effect of the official sector, the biggest owner of gold, being a net seller will inevitably affect the price, with the result that "gold is currently caught in an uncomfortable limbo between its historical role as a monetary standard, and a possibly more mundane future as a commodity metal, albeit a highly prized one." Gold still has attractions for investors. Most important, it is an easily traded asset that is no one else's liability - unlike cash, bonds, stocks, or other securities it does not depend on the Government or another party to make good its value. This has made it especially powerful as a defence against inflation. In addition, it lets investors and governments diversify their investments, and it is valuable as a "war chest" in the event of international crisis. Still, gold had until last week traced a steady decline in value since 1996. Already, its role in the defence of national currencies had faded as it was more effective for governments to intervene by adjusting interest rates. In the late 1990s, inflation has also become less of a concern. A consequence has been a steady stream of national gold sales (of which Australia was one of the first), which has become a flood with sales by Switzerland and the United Kingdom this year. Mr Southwood's argument, though, is that these sales will not last forever, and the European agreement will reduce the volumes sold. "Sooner or later you're going to get to the stage where the central banks have sold as much gold as they want to," he told The Sunday Age. "Then the price returns to an equilibrium level determined by supply and demand and the cost of developing new mine capacity." With the net selling by central banks now likely to be only 600 tonnes a year - half what had previously been expected - Mr Southwood is working on the basis that gold prices will return to US$350 in about five years. The result is that while it may still be a close call for some goldminers, it looks like the Europeans may have given the Australian gold industry just the breathing space it needs. theage.com.au