Coup has little impact on metal prices

While the recent crisis in the Soviet Union sent shock waves around the world and briefly threatened to end the new spirit of perestroika, the episode had almost no effect on metal prices.

As news reached the financial markets on Aug. 19 that Soviet President Mikhail Gorbachev was being held hostage by Communist hard-liners, nervousness in the market drove spot gold and platinum prices up slightly from their previous day’s closing prices of US$359.75 and US$354.5 per oz. respectively.

The price of nickel also advanced to US$3.76 per lb. from US$3.70 amid concerns that the attempted coup would diminish supply from Russia. But analysts say the jitters caused by the coup attempt were too short to have any lasting impact on the metals sector even though the vast Soviet empire appears to be disintegrating. They believe improvements in communications mean the market is now more sophisticated than it was in 1980 when the Iran hostage crisis drove gold to US$850 an oz.

When the Russian coup ended and the ringleaders were rounded up, metal prices, like Gorbachev, quickly returned to their former positions. By Aug. 28, the spot price for gold was US$355.30, about US$4 below its pre-coup trading level, but well within its recent US$350-360 trading range. Due largely to an overhang on the supply side, silver was trading at US$3.95, down six US cents from Aug. 16.

During the same period, platinum gave up US$14.60 per oz. to close at US$339.90 on Aug. 28. But analysts attribute the platinum price fall to a return to work at the Impala mine in South Africa which accounts for almost 40% of world supply and to heavy selling in Japan.

Before the Soviet crisis sparked a one-day US$12.50 rally, platinum had been suffering from the perception that scientific developments including the Nissan motor company’s alleged platinum-free exhaust will reduce demand. The lack of any discernible gold price rally during the coup attempt moved some market watchers to conclude that the yellow metal has been usurped by the U.S. dollar as the haven of choice in times of crisis.

But according to Catherine Gignac, precious metals analyst at McNeil Mantha Inc. in Toronto, investors will choose the dollar instead of gold only as long as they perceive the U.S. economy to be in a recovery mode. The record high closing of the Dow Jones Industrial Average of blue chip stocks Aug. 23 showed that the market is betting on a strong recovery. “We can’t say the move into the dollar is permanent,” said Gignac, who attributes gold’s narrow trading range to the growing popularity of gold options which don’t show up in the market price. “Nothing has changed regarding the fundamentals affecting supply and demand,” she said. While Gignac doesn’t expect gold to return to its January, 1980, peak of US$850, she said investors could see US$400 gold next year as production from mines in the U.S. and Australia declines.

Analysts claim the outlook on the base metals side is harder to predict because much depends on the speed and strength of the economic recovery. According to Nesbitt Thompson analyst Julian Baldry, the drop in the price of nickel to US$3.56 per lb. from US$3.70 on Aug. 16 is hardly surprising in light of the failed coup attempt and the wage settlement at Falconbridge’s Sudbury, Ont., complex.

Baldry says copper will remain near its pre-coup trading level of US$1.01 until extra supply from Latin America and elsewhere has been digested. “The Russian coup attempt made metal traders very nervous but it didn’t last long enough to turn that nervousness into much of an event,” he said.