A paradox surrounds the gold market: while the price of gold is at an 18-year low, the demand for gold is at an all time high. What is the cause of this discrepancy between the 'real' and the 'virtual' worlds of gold?
Despite the gold price keeling over to 18- year lows, a plethora of gold exploration companies continue to scratch the earth's surface for cheap yellow metal. Anglogold, the world's largest producer of gold -- 214 tonnes in 1997 -- announced recently that it is to cut its production by 17% so that it can produce profitable gold rather than, as Mr Bobby Godsell, chief-executive officer of Anglogold put it, "be involved in a civil engineering contest."
But what about the plunging price of gold? How much of it was caused by fundamentals and how much by illconsidered rumour? The gold market ended the third quarter of 1997 looking relatively healthy with the price around $330/oz. However, during the fourth quarter the gold price was to slide another $50 or 16%.
The rumour mill ground away at market confidence following an as yet unsubstantiated story that the sale of Venezuelan central bank gold was to blame for heavy selling on the New York market. Subsequently a Swiss government-appointed advisory panel recommended, in a blaze of publicity, that the Swiss National Bank sell 1,400mt of gold reserves. This announcement further reinforced negative sentiment towards gold since earlier announcements last year had already indicated the bank's intention to reduce its gold holding.
Mr Kelvin Williams, executive director of marketing at Anglogold, points out that this recommendation was made by an advisory panel and not by the Swiss bank board, and that the recommendation was only to go to referendum in 1999. This had not been taken into account and speculators had their way in the market. A new wave of selling drove the price down from $325/oz to below $280/oz in December, chopping $4.3bn off the market value of the Swiss gold reserves and over $54bn off the market value of all official sector bullion holdings.
So we can draw three conclusions: never discount the power of rumour in tarnishing the gold price; never discount the publicity impact of advisers' recommendations; never forget that an hour is along time in commodity trading.
But what was happening in the real world of physical demand for gold? Paradoxically, demand for gold for jewellery rose by 15% to a record high of 3,219 tonnes, which was equivalent to 80% of an overall...