EDITORIAL AND OPINION — Blame peace, balanced budgets and technology — Gold takes major tumble

If the predictions made by the doom-and-gloomers of the 1970s had come true, the world would have run out of natural resources by now, gold prices would be well over $1,000 per oz. and the Aden sisters would have star billing at international investment forums.

Canada geese would be extinct, instead of over-populating the nation’s parks, and we would be living inside plastic bubbles to protect ourselves from poisoned air and water.

The communists and capitalists would still be at each other’s throats, continuing their ruthless struggle for world domination, instead of joining forces to build fast-food restaurants in Red Square.

Dare we say it? The world, while not perfect, has become a safer, cleaner and better place to live than it was 50 years ago.

Communism has collapsed, inflation is being tamed, governments are getting their fiscal houses in order, environmental standards have improved, autocrats are being toppled, and the flow of capital and technology worldwide is helping the world’s toiling masses find opportunities for self-fulfilment that were not present two decades ago. And if that were not enough, crime in the streets of New York City has fallen dramatically.

While all these things are good for mankind, they are not necessarily good for gold prices. The yellow metal has long been a bulwark against political turmoil, war and revolution, as well as against economic uncertainty, inflation, government overspending and currency debasement.

At presstime, gold prices had slumped to below US$320 per oz., surprising those who predicted it would not dip below US$325. The major factor leading to the latest price slump was the Bank of Australia’s large selloff of gold reserves. It appears that bankers Down Under are following in the footsteps of other central banks which have recently reduced their gold holdings, led by the trend-setting Bank of Canada. The latest economic news from the United States has not helped matters, as it appears that U.S. interest rates are not poised for significant increases — at least not in the near term.

A decade ago, goldbugs could point to government incompetence in matters financial without argument because, back then, governments at all levels were spending like drunken sailors. These days, politicians are cutting spending and balancing budgets; right, left and centre.

All this peace and economic stability have placed downward pressure on the gold price. Fortunately, at the same time, demand has remained strong. Most experts agree that gold prices would be at higher levels were it not for the recent spate of selling by central banks.

Gold prices also have come under downward pressure as modern technology makes it possible to extract gold from deposits once considered uneconomic. The worldwide flow of capital this past decade has helped bring this technology to developing nations, where a number of large new gold projects have been brought into production.

All this means goldbugs will have to work harder to make a case for higher prices in the short term. The laws of nature and of supply and demand will, as always, take care of the long term.

If gold prices do not improve soon, there will be a reduced number of gold producers next year than there are this year and even fewer the year after that. Projects not sufficiently robust to pass muster with bank managers will fall by the wayside, further augmenting production shortfalls and driving prices upward.

And it will start, all over again.