GUEST COLUMN — Forecasting the future of gold

Through continuous work with both production-consumption and price statistics I had come to the conclusion that, at least for long-term projec tions, supply and demand on the one hand and price on the other, did not re late causally as introductory economic texts suggest.

Metal prices could be treated as independent variables, or only time-dependent variables, and supply and demand as the dependent variables. In that case long-term price trends could be developed without reference to far less reliable production and consumption statistics.

Without major external disturbances in the world mineral markets, real prices for specific metals must in the long run continue flat to slightly downward sloping.

Through the 1970s and early 1980s I had come, along different routes, to conclusions regarding the gold price similar to those expressed in 1974 by Paul Einzig in The Destiny of Gold. (A century and a half ago there existed an artificial floor price for gold which turned into a ceiling price after the Second World War.) He projected at that time — shortly after the gold price was freed and ownership in the U.S. legalized — a long-term equilibrium price for gold of $117.55 in constant 1967 terms which would equate to about $437 in today’s terms.

As the gold price retreated from its 1980 high, it reached almost exactly that value by 1984, retreating further in 1985, rising to another high in 1987-88, and passing this level on a downward trip in 1989, standing today at $91.03. In a paper presented to the Eighth International Precious Metals Conference, June 4-7, 1984 (for 1984 the gold price in constant 1967 dollars was 116.24), I pointed out: “As to the bottom line I think that the real price of gold is not going to rise to any significant extent over the long run but there is on the contrary some room for further downward correction.” At the Forum on International Market Problems and Opportunities Facing Canadian Mining, March 27, 1985, in Toronto, I gave as an optimistic mid-1990s price range for gold, again in constant 1967 U.S. terms of $110-140. That was rather optimistic, even for an “optimistic” forecast. Lastly, in a paper released by the Canadian Institute of Mining and Metallurgy, A New Approach to Long-Term Metal Price Forecasting, in June, 1988, I suggested that in the year 2000 the mid-range value for the gold price might be $95 in 1967 dollar terms, again a number that today seems optimistic. Still, it has been better than most others that have been put forward.

The reason why gold forecasts in retrospect seem to have erred somewhat on the high side seems to lie in four factors:

— the changes through the late 1980s and early 1990s in recovery technology leading to significant increases in supply particularly from Canada, the U.S. and Australia;

— perhaps as a result of events in the former Soviet Union the role of gold as a store of value of last resort seems to have diminished significantly, at least for the time being;

— for quite some time now other investment instruments have outperformed gold; and

— a large proportion of above-ground gold is held by national governments (notoriously irrational economic actors).

I have never pretended to forecast exact number for specific years — nobody can do this. What I have projected were long-term trends and ranges. On the whole then, I am quite happy with the way my gold forecast has stood up. Others for copper, nickel, zinc and aluminum prices and for nickel consumption and production were as good or better. If there is one thing I regret it is that, although I have throughout been charged with being too pessimistic, I seem to have erred rather on the side of optimism. — Gerhard Anders is chief research analyst of the Mines and Minerals Division of the Ontario Ministry of Northern Development and Mines.