Price of gold is following downward trend

The recent drop in the gold price to $345.50, a 4-year low, is part of an overall decline in the value of the metal, some analysts suggest. Although gold had picked up to $347 recently as investors took advantage of the bargains, some analysts see little hope of the price recovering soon above the psychological barrier of $350.

Over the past three months, the gold price has been hit by three separate “large volume sales” by either the Russians or the Middle East or both, said Ron Coll, a gold equities analyst with McLean McCarthy. On March 26, the first of these large-scale transactions sent the gold price plummeting to $370, a $23 drop.

But the $6 drop on June 14 had “more to do with the lower inflationary news that came out of the U.S.” than with heavy selling by Arab traders, he said. On that day, the U.S. government announced that the producer price index rose by 0.3% in May, suggesting that inflation is “not as severe as expected.”

Aside from low inflation, which discourages gold purchases, other financial trends are depressing the gold price, including a strong dollar and high interest rates, he added.

On the production side, one analyst said high-grading (the practice of mining higher-grade ore first to the detriment of a long-term mining plan) is increasing the gold supply. In Australia, gold miners are “pulling out all the stops” to mine the richest ore before a new gold tax is introduced next year, he said. And in South Africa, he believes miners may also be tempted to high- grade before Nelson Mandela, who has threatened South African mines with nationalization, takes power. He predicts gold will fall to $250 within the next 18 months.

“The only thing that’s going to reverse the price of gold now is if some of the producers in South Africa shut down,” said Rick Cohen, analyst for BBN James Capel. “That might be just the stimulus” to spark a jump in the gold price, he said. As many as 13 of South Africa’s gold mines (representing about 20% of the country’s total production) are currently operating at a loss.

According to the Annual Review of the World Gold Industry 1990, published by Shearson Lehman Hutton, the demand for jewelry, which represents about 70% of total commercial fabrication, will remain strong in the 1990s. But some analysts suggest that the recessionary climate is forcing North Americans to “cut back on non-essentials,” including jewelry, forcing the gold price down.

“The news can hardly be bleaker, and there does not seem to be any ray of hope in the near future,”said BBN James Capel in its June 14 edition of International Mining Review.