Gold needs a miracle.


Gold has fallen below the psychologically important price of $300 per ounce. This once all-important metal is now regarded as the bottom of the pile in terms of investment, but it still continues to be the ordinary person's favourite item of jewellery. Can it make a recovery?

As the new year begins, the gold mining industry finds itself at a critical period in its turbulent history. Prices are below the psychologically important barrier of $300/az--the lowest point in over a decade.

Ironically, gold consumption is rising. Gold demand in the markets monitored by the World Gold Council, which account for almost 80% of global offtake, rose 11% during the first 9 months of 1997 to 2,191 tonnes, led by strong growth in India, where demand reached a record level of 535 tonnes, and the Middle-East. Around 80% of gold demand is related to jewellery consumption, and two-thirds of fabrication demand is from Asian countries, with India as the largest single market. Gold buying tends to be "price-elastic," and hence jewellery off take will increase as its price falls.

Turning to the supply side, despite a 15% year-on-year fall in the average US$ gold price in 1997 to $331/oz, mine output continued to rise. The CPM Group (New York) projects a 1.7% increase in newly mined gold to 1,947 tonnes, with the total gold supply, including scrap recycling, estimated at 2,802 tonnes. Total fabrication demand is projected at 3,076 tonnes. Thus on CPM's analysis, the supply deficit will be filled by a combination of producer hedging, private sales, and further disposals by central banks from their stock pile.

Last year, gold had completely lost its lustre. Its investment status, once seen as an instrument of financial security, was tarnished. As Mr Eddie George, governor of the Bank of England put it: "Whereas gold used to be seen as a good asset, it is now seen as the bottom of the pile."

The steep corrections in global stock markets since the last quarter of 1997 have not led to a major rush into bullion (interestingly, during the crash of 1987, the gold price rose from $400 to $500).

So what has caused this enormous change in attitude? Probably a combination of factors including expectations of more central bank sales, aggressive short-selling by hedge funds, producer hedging, mostly by South African and Australian mines, as well as the recent flight into quality US and European government bonds amid financial turmoil in SE Asia.

Central bank gold reserves have...

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