METALS MARKETS — Gold up on renewed investor interest

The sharp turnaround in the gold price in April and its continued strong upswing should herald renewed financial strength for this sector of the mining industry.

Spurred by investors jumping into the market, to date average May gold prices are ahead to US$363.16 ($341.95) per oz.

The impact of the upswing startled market watchers who are still uncertain whether it reflects a long-term change of direction or is merely another blip in the long downtrend. The gold market is driven by a wide variety of factors including rumor, mob psychology and, most importantly, the natural law of supply and demand.

According to Gold 1993, published by Gold Fields Mineral Services of London, about 3,182 tonnes of gold changed hands in 1992. Mine production has grown at a rate between 50 and 100 tonnes per annum from 1,121 tonnes in 1983 to 1,841 in 1992. Net East Bloc sales fell to 66 tonnes in 1992 compared with a more normal 200 to 400 tonnes per year.

As a group, annual net central bank purchases and sales activity can range from virtually nil to a few hundred tonnes, either as net buyers or sellers. During the last two years, several central banks, including Canada’s, have begun programs to transfer some of their gold into currency reserves. The most likely reason is to raise cash in case the current economic downturn becomes even more serious and tax revenues and borrowings are unable to cover needs. In 1992, the net position of this group supplied 599 tonnes to the market.

Old scrap returns to refiners generally vary from 300 to 500 tonnes per year. The 1992 figure totalled 472 tonnes, which falls near the upper end of the range.

Other supply, which includes loans, forward sales, hedging and investor sales, has ranged from 100 to 500 tonnes in recent years; in 1992 it amounted to 242 tonnes. Forward sales by producers have become an important segment, amounting to 149 tonnes in 1992. Producers will sell forward to safeguard needed sales revenue especially when they fear price drops in weak markets. It seems reasonable to assume this volume would decline if prices rose substantially.

On the demand side, fabrication is the most important consuming sector, totalling some 2,859 tonnes in 1992. The major components, mainly jewelry and electronics, have grown to 2,602 tonnes

in 1992 from 959 tonnes in 1983.

Other demand from a variety of purchasers, while much smaller in total amount, is often the main price setter. In recent years, purchasers of all non-fabrication categories have annually bought between 300 and 800 tonnes of the yellow metal, with prices rising or falling with these tonnage movements. Reasons for buying vary from asset protection, hoarding, hedging and outright speculation.

East Bloc and central bank sales, producer hedging and the activity of investors will determine the direction of the gold market in the coming months.

Cobalt markets are quiet. The U.S. stockpile sales appear to have steadied prices and consumer nerves. With end-of-April values in parentheses, spot May prices are mainly unchanged with western brands US$14.50 ($15) per lb., Russian $13 ($13) and producers officially at $18 ($18).

Copper prices to date in May eased their sharp decline pausing around US81.3 cents (88.5 cents) per lb. as LME and Comex inventories continued their rise reaching 515,200 (492,580) tonnes.

Nickel to date in May LME nickel dropped to US$2.626 ($2.710) per lb. as LME inventories continued their steady 1,000 tonne-per-week rise to 94,980 (89,910) tonnes. With a similar tonnage normally held by producers, total stocks are now just over three months Western consumption.

Molybdenum oxide edged up on news of falling copper prices and continued low production to US$2.15 ($2.10) per lb. Producers are reported to be asking $2.25 and higher on recent inquiries. The 6-month inventory overhang will keep a lid on prices for a while longer.

Lead markets continue very quiet. Cash LME prices eased slightly at US18.5 cents (19.1 cents) per lb. as stocks rose again to 254,050 (249,500) tonnes. Zinc markets were also quiet with cash prices down to US44.7 cents (45.2 cents) per lb. as stocks jumped again to 659,750 (636,800) tonnes. The exchange-traded precious metals remain active and bullish. Platinum continued its upward move with prices-to-date in May ahead to US$383.88 ($369.14) per oz. Palladium gained again to US$119.33 ($114.84) per oz. and rhodium dropped again to US$925 ($1,320) per oz. Silver, believed tied to the gold upturn, rose strongly to US$4.43 ($3.96) per oz.

— Jack Dupuis is a minerals marketing consultant based in Thornhill, Ont.