Gold price continues to tumble

Gold prices dropped to 3-year lows in early January, hitting a London spot price of US$356.60 per oz. on Jan. 8, down $12.80 from Dec. 27, 1996.

The tumble comes after spot prices peaked above US$400 per oz. in early 1996, with a spike of US$414 in February. Overall for 1996, gold traded at US$388 per oz., slightly above the average 1995 price.

The last time gold consistently traded below current levels was during 1992 and early 1993, when it traded below US$350 per oz.

Market-watchers point out that two factors are pushing down gold prices: European central bank gold sales and the trend toward low inflation and interest rates that is prevailing in most industrialized countries.

For a European government to gain membership in the European Economic and Monetary Union (EMU) and be able to use the new “euro currency’ in 1999, it must have a deficit-to-gross-domestic-product ratio of 3% or less in fiscal 1997. European governments not yet adhering to this EMU fiscal guideline are sorely tempted to sell off a portion of their gold reserves to make up the difference.

Central bank gold reserves total 35,000 tonnes, or about 10 times the total annual world demand. Gold sales and threats of gold sales by European central banks are expected to continue to dampen gold prices in the short term.

Gold, the traditional hedge against inflation, has also suffered from the current worldwide disinflationary environment, as well as the relatively peaceful geopolitical scene.

Investors have been chased from gold and the other precious metals on to the booming stock and bond markets. Whether this situation lasts depends on how well-founded are the twin fears that 1) interest rates may soon rise with continued U.S. economic growth and 2) equity prices have become over-extended.

Gold Fields Mineral Services points to a factor that may put upward pressure on gold prices as the year progresses: continued record fabrication demand.

This demand is greatest in the form of gold jewelry, and comes chiefly from the Middle East, India and China.