To:Bearcatbob who wrote (223)
From: mikesloan Sunday, Jul 6, 1997 3:21 PM
Respond to of 80032
Gold industry meltdown
Australian Financial Review July 7/97
By Steve Wyatt and Mark Dixon
Australia's gold industry is facing a crisis after a plunge in
gold bullion prices to 12-year lows on Friday and
predictions of further sharp falls to come. Gold collapsed
to $US322 an ounce in London trade over the weekend
after the Reserve Bank of Australia announced it had
liquidated two thirds of Australia's gold holdings, sending
shock waves through the world's bullion markets.
Even though the metal rallied slightly to finish at around
$US324.50/oz, more than half of Australia's gold mines
have been rendered uneconomic.
In Australia, which has the highest average gold
production costs in the world at $US358/oz, several
operations face closure if not protected by forward sales
positions.
Market experts say bullion could fall another 25 per cent.
"I think there is worse to come," said Mr Dinsa Mehta,
managing director of global commodities with Chase
Manhattan in New York. "We expect a reasonably sharp
spike down to between $US290/oz and $US310/oz."
Others are even more bearish.
"I think gold is far more likely to hit $US250/oz in the
next 24 months than it is to hit $US450/oz," said Mr Ted
Arnold, London-based metals analyst with Merrill Lynch.
"Gold has had its day in the West as a financial asset and
as a hedge against system risk." Mr Arnold said the drop
below $US326/oz meant that the price could now fall to
$US280/oz -- gold's lowest price since 1984.
He said the gold market needed to fall to a level that
would eventually force the closure of many mines --
cutting up to 300 tonnes from high-cost producing
countries such as Australia and South Africa.
Of the top 10 Australian producers, the average
company is losing $70 an ounce on gold produced at
spot prices. Major mines that produce at a cost above
the spot gold price include Newcrest Mining's Telfer,
Ora Banda and New Celebration mines, Wiluna Mines'
Wiluna operations, Australian Resources' Gidgee and Mt
McClure mines and Sons of Gwalia's Marvel Loch and
Laverton.
"It's looking pretty crook," said Mr John Macdonald,
gold analyst with Eyres Reed Ltd. "Expect a flight to
quality to pervade the gold market."
Analysts said producers were now likely to take the knife
to operations to slash costs, with several companies
needing to contemplate drastic mine re-optimisations.
On the stockmarket, gold stocks face another week of
uncertainty after sharp falls on Friday. Some stocks fell
as much as 12 per cent before bargain hunters lifted
prices before the close of trade. The gold index closed
the day with an overall loss of 4 per cent.
Mr Andy Smith, precious metals analyst with Union Bank
of Switzerland in London, said the behaviour of the gold
market was frighteningly similar to that of silver in the last
30 years of the last century when the metal was
demonetised and lost two thirds of its value.
Mr Mehta suspects this gold market has a two-stage
future: firstly a severe price drop due to the downsizing of
gold holdings by central banks and international
organisations, like the International Monetary Fund,
followed by a significant upward rebound in price.
Right now the market is firmly stuck in stage one. The
issue is what will be the bottom of the price slide.
The announcement by the RBA that it had 167 tonnes of
gold renewed market fears of a fresh round of
downsizing by central banks of their massive holdings of
gold.
"The attack of the killer koala bears," was how Mr Smith
described the Australian central bank's gold sale. "This is
the most bearish announcement on gold since Belgium's
first sale in 1989."
But it was not the RBA's gold sale alone that did the
damage. Just one day before the RBA announcement the
gold market had broken through a significant support
level of $US336/oz that had been maintained for five
months after a 22 per cent fall in value since the beginning
of 1996.
The RBA sale heightens a morose market mood; sell
now because there is more downside for gold. The
message has not been lost on the big investment (or
hedge) funds, who have been selling the market along
with the gold producers.
"There has been Australian producers selling in big
volumes over the past 72 hours," said Mr Mark
Freemantle, gold dealer with Rothschild Australia, noting
deals as big as 1 million ounces.
The gold market has changed. Inflation has disappeared,
the major world currencies are freely exchangeable and
derivative markets have grown like mushrooms. In short,
there are plenty of ways today to cope with systemic
risks that were not available even ten years ago.
Gold is becoming less a reserve currency and marching
towards being a commodity. And the world's central
banks have done little about it. They are sitting on a
massive 30,000-tonne stockpile of gold.
c This
Market Data 
Markets 
AI
