Volatility of gold price followed with keen interest

The market collapse of October, 1987, followed by a falling price of gold in 1988 and a depressed price for the precious metal for a good part of 1989, had a devastating effect on junior mining companies and small producers. Developing properties that looked so promising during the heady flow-through days of 1987 and early 1988 were suddenly cast in a different light. Owners knew they still had a profitable operation, but placing them into production would take a while longer.

Gold, which briefly topped US$500 per oz. in London late in 1987 and averaged US$446 that year, slipped to US$437 in 1988 and US$382 last year. Late 1989 saw the gold price on the rise again, to above $400. Since then, the metal’s continuing show of strength has been accompanied by much volatility.

“Anything over $400 makes at least a couple of our projects more attractive,” said Hugh Harbinson, president of Queenston Mining (TSE), referring to the Anoki venture at Kirkland Lake, Ont., and the Pandora property at Val d’Or, Que.

Anoki is a joint venture with Inco (TSE), the latter having completed a feasibility study last year which indicated an operating cost of US$330 per oz. According to Harbinson, a price of US$415 could activate production within a 5- month time frame. The adjacent Queenston-Inco mill could be used to process the ore. Reserves of 650,000 tons grading 0.14 oz. gold per ton, with the potential for additional tonnage, have been identified.

At Pandora, where the partner is American Barrick Resources (TSE), Harbinson said 2.5 million tons averaging 0.13 oz. have been identified. A 30,000-ton bulk sample is planned for this year, the material to be processed at Barrick’s Camflo mill.

Elsewhere, some work programs have been suspended. Near Rouyn- Noranda, Que., the Donalda project has been put on hold, at least as far as 65% owner Minnova (TSE) is concerned. Minnova said the project, which recently underwent underground evaluation and an internal viability study, requires gold prices above current levels to provide an acceptable return on investment.

For its 1989 fiscal year, Minnova took a $7.2-million writeoff for the property. Minnova’s partner in the Donalda venture is junior Thunderwood Resources (TSE).

The depressed gold price took its toll last year on some higher cost gold-mining operations, including the MacLellan mine of LynnGold Resources (TSE) near Lynn Lake, Man., the mining operation of Bachelor Lake Gold Mines (TSE) at Desmaraisville, Que., and the old Kerr mine of bankrupt Golden Shield Resources at Virginiatown, Ont.

Also in 1989, Citadel Gold Mines (TSE) decided to suspend operations at its developing Surluga project near Wawa, Ont.

The price of gold, it is said, reacts in a contrary fashion to other markets. Investors seeking safe ground for their money have tended to turn to gold during periods of general economic or political instability.

Last year, for example, the strength of the U.S. dollar exerted critical downward pressure on gold. “Apart from a few special movements, the U.S. dollar was the most important factor for the development of precious metal prices in 1989,” wrote Degusssa of West Germany in one of its monthly reports.

The dollar itself, said the metals firm, was essentially influenced by the economic development within the country. Higher interest rates played a significant role. The net result of a strong dollar was that the U.S. currency became an interesting investment medium over lengthy periods of time, pushing gold and other precious metals into the background.

Adding to the price volatility has been the changing face of communism in Eastern Europe and political developments in South Africa, where apartheid appears to be on the wane. Reliable sources report Soviet gold production to be second in the world only to perennial leader South Africa.

Peter Cavelti of Cavelti Capital Management Ltd. presents an interesting argument in the case of the USSR. “For gold, the implications of this Soviet enigma are startlingly different,” he says. “Will the impending chaos necessitate larger than ever sales of gold to the West, or will the flow of production be disrupted? Evidently, both events are possible.”

In South Africa, the winds of political change may or may not mean much to a domestic gold industry which for more than a few years has been troubled by rising operating costs and labor unrest. While it remains the dominant producer-nation, South Africa’s share of total global production has fallen dramatically as output has picked up markedly elsewhere in the world.