Gold expert predicts fundamentally strong, volatile market

Until late last year, gold was even less popular as a speculative trading commodity than pork bellies, live hogs or even lumber.

“The price was going nowhere,” says author and gold market expert Timothy Green. “The volumes were down on all exchanges and the number of players was down.”

Well, that’s all over, says Green. “It’s a totally new market.” But this is a market born not solely from speculative greed. The fundamentals of the market — supply and demand — are favorably disposed to a prolonged bull market.

Production from gold mines, which has nearly doubled in the past decade, spurred by the 1979-80 runup to US$850-per-oz. gold, has now peaked. The market has absorbed all the new gold, according to Green, who should know. Since 1966, he has studied the gold market, having written books on the subject, as well as compiling highly respected annual reviews for Goldfields Mineral Services. In fact, he calculates he has clocked a million miles tracing the trail of gold around the world. His latest book, The World of Gold, has just been published by Rosendale Press. (To obtain a copy, see end of article.)

In an interview with The Northern Miner, Green says the other sources of market supply are also drying up. These include non-mine sales, such as the disposal of official Soviet gold reserves, “disinvestment” of physical gold through Swiss banks, and central bank sales. All three sources have declined as gold sellers.

“You won’t see the quantities that could destroy the market,” Green says. On the demand side, annual jewelry industry offtake has climbed to the point that it alone can absorb mine supply in a given year.

“That is what really turned the market around. It now has great depth and can absorb large amounts of gold.”

The strength earlier this year was remarkable. Green estimates that, through January and February alone, physical demand was so strong that, had it continued month by month right to year-end, world production would have fallen about 1,800 tonnes short of matching offtake. With the rise in the gold price, offtake has slowed, though Green nevertheless predicts physical demand for the full year will reach about 3,000 tonnes against total world mine supply (including scrap) of 2,200 tonnes.

From a historical perspective, the driving force in the gold market rise from 1973 to 1983 was demand from the Middle East– specifically, the oil money generated after the mid-1970s when the Organization of Petroleum Exporting Companies increased prices. Today, that kind of money does not play as large a role. But physical purchases are strong, and volatility will be driven by something fairly new — commodity funds which funnel money into any commodity (be it wheat, gold, lumber or orange juice) which shows a strong trend. “This is absolutely hot money focused in relatively small markets,” Green explains. He estimates commodity funds in total have about $25 billion in assets.

“Their trading has absolutely nothing to do with fundamentals. If the chart on the screen looks good (it’s a buy or sell).” The springboard for the price rise this year, he adds, was physical demand (much of it from the Far East). That created the rising trend and attracted the attention of commodity funds. In turn, the performance of gold in the past 10 months, rousing itself from the US$330 doldrums to the spike at US$410, the retrenchment down to about US$360 and now up again to levels around US$370, is bringing in the gold mutual funds. The money from such funds is less speculative than money coming from commodity funds. It is, in Green’s words, “serious money” which bodes well for the longer-term prospects of gold.

The World of Gold is available from Allman & Associates, 255 Yonge Boulevard, Toronto, Ont., M5M 3J1. Fax: (416) 483-6142.