Gold price will be determined by U.S. fund activity

Despite little variation in the gold price of late, several components in the supply-demand equation have changed

dramatically.

Such was the gist of a luncheon presentation, held in Toronto, by London-based commodity research company Gold Fields Mineral Services (GFMS). Representatives of the firm noted that, on the supply side, production declined to 2,296 tonnes during the year and that, although the drop was only 0.6% (representing 13

tonnes), the event marks the first time in almost 20 years that production has fallen.

According to Gold Fields’ annual survey, the drop is largely attributed to output declines in three countries. Output from South Africa plummeted to its lowest level since 1958, while the Canadian yield fell for the third year in a row. In the U.S., production dropped for the first time in 15 years.

In contrast, production from Australia and many developing

countries, especially those in Latin America, continued to rise.

Despite a fall in hedging activities among South African

producers, North American and Australian gold miners continued to add supply to the market. Relative to 1993, producer hedging in 1994 added about 70 tonnes of gold to the world market.

Official sector sales also showed a dramatic change relative to the previous year. These amounted to 86 tonnes in 1994, compared with more than 1,000 tonnes over the previous 2-year period. In 1994, Canada ranked as the largest seller, having disposed of 67 tonnes of the yellow metal. At the end of the year, however, Canada changed its strategy by effectively eliminating official sector selling. Consequently, in the first quarter of 1995,

Canada did not sell any gold.

Scrap supply increased by 7% in 1994, reaching a record 593

tonnes. This, in part, reflects a trend toward greater recycling of gold jewelry.

Overall, the total world supply of gold fell to 3,018 from 3,282 tonnes in the previous year.

On the demand side, the two main contributors were the

fabrication and investment sectors.

Overall, the fabrication sector, consisting largely of jewelry and electronics, showed a modest recovery in 1994, rising by 1%.

Most of this growth occurred in the jewelry industries of India and the Far East.

The most volatile component of demand was the investment sector.

In 1993, investors — particularly those in Europe and North America — bought about 300 tonnes of gold, a transaction that was essentially reversed in 1994, when nearly 200 tonnes were sold. The change was attributed to large U.S.-based gold funds, which sold their holdings because of rising interest rates and low volatility in the gold price.

The spread in price was only US$26 per oz. in 1994, the lowest since 1968.

While unwilling to forecast a gold price for 1995, Gold Fields did concede that signs in the market are generally positive.

Physical demand in regions such as Asia continues to strengthen, with imports being more than 50% higher than they were a year ago.

The report concludes the gold price will be derived from relative movements in the U.S. dollar and interest rates.