Metals Report Gold starts ’87 with bang

That oppressive U.S. trade deficit just won’t go away.

On a downtrend since August, it seemed like the deficit was slowly coming under control.

Then November’s deficit was announced — $19.2 billion, the largest monthly trade deficit ever.

The initial reaction was that the U.S. dollar devaluation since early 1985 just hasn’t been enough to offset the staggering trade imbalance. The dollar, it seems, has a long way to drop in order to get that trade deficit in shape.

The possibility of a declining dollar immediately translated into a higher gold price. After all, all other things being equal, gold should still be worth as much in other currencies as it was before the dollar’s decline. In other words, it will take the same number of deutschmarks to buy an ounce of gold, but it will take more U.S. dollars.

Add to that the continuing firming of oil prices — a hint of higher inflation — and it’s not hard to understand why gold has started the year with a strong uptrend.

On the last day of 1986 the single London gold fix was $390.90. It hasn’t been that low since. In fact, only once so far this year has the closing fix been below $400, and that was $398.45 Jan 5.

This week the price took off strongly from $401.70 on Jan 7 to $415.10 on Jan 14.

Now, although there are still some gold bears around, they’re hard to find. Even California-based technical analyst James Dynes, a bear on gold since mid-1982, is recommending gold mining shares and gold bullion.

Another technical analyst, Ian McAvity, is more strongly bullish.

“By almost any definition one wishes to use, a bull market is intact,” says Mr McAvity.

“When the golden fireworks get going to more fully reflect the weakness of the U.S. dollar plus the prospect of some resurgence of inflation, then I think you will see the silver market come alive.”

Gail Levey at Shearson Lehman Brothers in New York says investor interest in owning precious metals has clearly picked up in recent months, a good sign for a continuing bull market.

“We think that this mainly reflects the perception that (precious metals) represent an alternative investment vehicle in a time when world economic problems suggest at least some diversification out of financial instruments,” says Ms Levey.

“A dollar `rout,’ i.e., a hard and fast drop, would be very bullish for precious metals as it would threaten the stability of the Western World’s fianancial system and raise inflationary expectations. More likely the dollar will decline at a softer pace.”

Ms Levey says the 1986 gold market shows a deficit of about 2.4 million oz for the year, its best fundamental picture since 1981.

Sharps Pixley, bullion brokers based in London, expects 1987 to be another year of gold supply deficit.

“Logic tells us that despite the distortions, 1986 may well have set the pattern for 1987. Although the Japanese may be less active this year, the sharp rallies seen last year as a result of their activities have once agaim focused investor attention on the bullion market, particularly in view of the way that stockmarkets have wavered recently and the return on interest bearing instruments has declined. “Nineteen eighty six,” says Sharps Pixley, “will be remembered as that of the Japanese.”

Japanese buying for its coin minting program was the predominant influence on the market in 1986.

Metals Week, a New York publication, suggests that a decline in Japanese buying could be offset in 1987 by a slowdown in Soviet, Chinese and East European gold sales plus the enormous success of the American Eagle gold coin.

Improved oil prices, for example, may ease the Soviet Union’s need to sell other commodites to earn foreign currencies.

World gold mining production increased by 4.5% in 1986 to 50.8 million oz from 48.6 million oz according to the Washington-based Gold Institute. It predicts that in 1987 the U.S. will take over Canada’s rank as the world’s third largest gold producer after South Africa and the Soviet Union.

If the U.S. November trade deficit triggered a sharp rise in U.S. gold prices, keep an eye on December’s figures due out Jan 30.