Gold bugs confident in metal’s fundamentals

Gold bugs have been watching, perhaps nervously, as the price of the yellow metal has drifted down. At presstime, it was trading in the US$380-per-oz. range, off from just below US$400 a few weeks ago.

Despite the drop, most analysts remain confident in the precious metal’s strong supply and demand fundamentals.

In his latest report, John Lydall, mining analyst with First Marathon Securities, reports that, regardless of these fundamentals, the US$380 level will become crucial if a further retreat occurs.

Meanwhile, Gold Fields Mineral Services (GFMS), a London-based commodities research company, has released 1993 estimates of global supply and demand for gold. Supply and demand paralleled each other, with both having dropped about 4.5% to 3,348 tonnes, from 3,507 in 1992.

Even though mine production increased supply by about 1.7%, GFMS states that a 24.3% decrease in net official sales by central banks caused the overall drop in supply.

All the components of demand were estimated to have dropped in 1993, with the exception of investment demand and demand for coins, which rose by about 764.5% and 15.3%, respectively. What this suggests is that demand in 1993 was largely a result of investor activity, a trend which most analysts believe has the effect of increasing price volatility.

In its forecast for 1994, GFMS points to three factors which are expected to affect supply and demand:

* One is that demand for gold will largely be a function of the pace of economic recovery in North America, Europe and Japan.

* The movement of interest rates is also expected to influence demand, albeit to a lesser extent. As the recovery takes hold, demand for goods both here and abroad will increase, leading to higher consumer spending and inflation. As interest rates decline, investors, seeking higher returns, might move funds from those markets into gold, thereby increasing investor demand. * On the supply side, GFMS suggests the past two years have shown gold consumers and investors are able to absorb substantial quantities of gold. As a result of this 2-year bulge in supply being absorbed, GFMS is uncertain as to whether hedging programs initiated by gold producers will continue to cap any price rise.

Even though the fundamentals outlined by GFMS indicate gold’s price should increase, many analysts are concerned about whether the US$380 support level will be breached.

Rhona O’Connell, gold analyst with London-based T. Hoare & Co., says that while investors should exercise caution when the price is below $US400, interest rates, inflation and a shortfall in supply all indicate gold could rise to $US440. If, however, the rise is too sudden, physical demand from groups (such as jewellers) which use the metal could be choked, leading to a decline in price.

The market has also reacted to unsubstantiated reports that the late Ferdinand Marcos, ousted dictator of the Philippines, had hidden a large cache of gold in Swiss banks. This report was said to be partially responsible for the recent fall in price, indicating how apprehensive and sensitive the market is.

Volatility — resulting from speculative investor demand, a nervous market and a price which is testing support levels — is rendering price forecasts difficult to make.