To:carpe diem who wrote (304)
From: mikesloan Tuesday, Jul 8, 1997 4:34 AM
Respond to of 80032
Gold price freefall continues
Metal loses lustre as inflation hedge
Tuesday, July 8, 1997
By Stephen Northfield
Investment Reporter Globe and Mail
Gold prices continued their freefall yesterday, prompting some investors to ask if the metal is losing
its status as a hedge against uncertainty.
The market wasn't signalling much confidence yesterday. Bullion dropped another $6.10 (U.S.) an
ounce to a 12-year low of $318.10, after dipping below $314 earlier in the session. That's more
than 12 per cent below gold's 1997 high of around $363 in late February.
Gold prices have been plunging since news last week that Australia had sold off two-thirds of its
reserves, the latest in a series of central bank gold sales that have roiled bullion markets.
Besides a good bout of war or natural disasters, gold's best friend has traditionally been inflation.
The problem is that inflation hasn't been too gold friendly of late. "You don't need an inflation hedge
when there isn't inflation," said Sherry Cooper, chief economist with Nesbitt Burns Inc. "Inflation
expectations have declined dramatically."
Ms. Cooper noted that cyclical peaks in inflation in G7 countries have been dropping for the past
20 years. Most surprising of all, the U.S. economy is now in its sixth year of expansion, "and still
price pressures continue to diminish," she said.
There are other ways to hedge against inflation, Ms. Cooper said, noting the introduction of
inflation-indexed bonds by a number of countries. "And those other ways earn interest, while gold
does not."
Fiscal prudence among governments worldwide has helped usher in an era of price and interest
rate stability.
Inflation across Europe averaged about 1.5 per cent on an annualized basis in May, U.S. inflation is
expected to be about 2 per cent this year, while Canadian inflation was running at an annualized
rate of 1.9 per cent during the first half of this year.
Besides making gold look less attractive as a hedge against uncertainty, that has created an ideal
environment for stocks and bonds. The eye-popping rally in stocks has made rolling the dice on
gold look like a mug's game.
Despite the longer-term trend toward lower inflation, some analysts say that it is premature to argue
that bullion's historical role as a hedge against inflation is coming to an end.
"The correct way to put it is that we're not concerned about inflation at the moment," said Martin
Murenbeeld, an economist and long-time gold watcher based in Victoria. "When we get concerned
about inflation again, the chances are we will look for inflation hedges and gold will be one of
those."
The new era of low inflation and high growth in the U.S. economy is "a very short period in
history," cautioned Victor Flores, senior mining analyst with Marleau Lemire Securities Inc.
"There's no question that in terms of the global economy, we're in pretty darn good shape. Does
that translate into world governments being fiscally prudent for ever and ever? I doubt that."
Inflation is not the only game in town for gold. In all the hoopla about central bank selling and
wilting inflation it's easy to forget that gold is also a commodity used for industrial and consumer
purposes.
In fact, demand for gold, especially in the developing world, has rarely been better, as buyers move
into the market to pick up bullion at fire-sale prices. Demand from developing countries was up 22
per cent in the first quarter of the year and is now at record levels, analysts said.
The problem is, another round of selling by central banks could swamp whatever support bullion
could get from firming demand. About one-quarter of the world's above-ground gold supply is
ferreted away in central bank coffers, enough potential supply, if sold into the market, to depress
gold prices into the next century. Ms. Cooper said a recent report issued by the U.S. Federal
Reserve Board concluded that "central banks no longer have a need to hold onto their gold
reserves."
What ultimately should give support to the market are the laws of supply and demand. On the
supply side, the low bullion price will drive marginal gold producers to mothball higher-cost mining
operations, reducing the amount of new gold coming to market.
It's estimated that half the South African gold mines can't generate a profit at current prices.
Yesterday, Johannesburg-based East Rand Proprietary Mines Ltd. said it was shutting down its
Benoni Gold Mining division, putting 100 miners out of work.
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