NEWS ANALYSIS : Gold Price Meltdown May Not Be Over Yet : Precious metals: With the world relatively stable and inflation fears put to rest, analysts aren’t looking for any quick surge in the market.
Gold prices, which rallied a bit on Friday after plummeting to a six-year low this week, may not have seen the worst of their doldrums.
Many market experts, discouraged by relative worldwide stability and a lessened threat of inflation, see little hope for a near-term revival in the beleaguered gold market.
“We are seeing everyone from the day traders to the leveraged purchasers to the fund managers unloading left, right and center,” said Bruce Kaplan, president of Kaplan & Co., a precious metals dealer in Santa Monica. “There is absolutely no demand for the metal as an investment.
“I am usually able to find a silver lining--no pun intended--somewhere in the market,” Kaplan added. “But this time things look so bleak that it is impossible to be optimistic.”
After hitting a six-year low Thursday, gold for August delivery closed up 70 cents an ounce at $334.80 in Friday’s trading on the New York Commodity Exchange. Until then, the metal had lost $16.20 an ounce over the course of the week after the release of several economic reports that squelched concerns about any rapid rise in inflation.
Thursday’s Commodity Exchange close of $334.10 was the lowest since April 3, 1986, when gold hit $332.30, the exchange said.
The gold market, which tends to thrive in times of high inflation and political unrest, has been unraveled by unusual global tranquillity. The collapse of the Soviet Union was particularly devastating. Not only did it make the possibility of nuclear war remote, it caused the former Soviets to sell a large portion of their stockpiled gold to raise cash.
Since 1989, gold has been trading between $350 and $400 an ounce--a far cry from its early 1980s peak of more than $800 an ounce.
Gold got a short-lived boost last month when it looked as if civil war was possible in South Africa, which produces about 20% of the world’s gold supply. But those fears dissipated when a two-day strike by black workers produced little violence. The metal’s price, which hit $360 an ounce by the end of July, began to slip.
Meanwhile, inflation worries, which had picked up a bit when the Federal Reserve pushed down interest rates last month, were quashed when the government this week reported that consumer prices rose by a paltry 0.1% in July. Overall commodity prices, as measured by the Commodity Research Bureau index, also hit a six-year low as a result of ample supply and slack demand for natural resources such as gold, wheat and corn.
“With the economy as soft as it is, I think it is a real push for gold to come on with a real recovery,” said Gary Schlossberg, senior economist at Wells Fargo Bank in San Francisco.
Its price may fluctuate temporarily, Schlossberg added. But, at least for the near term, it is not likely to enjoy a sustained climb, he said.
Still, some believe that the market is near its bottom. Although they don’t know when it might again begin to climb, they say it is not likely to fall much further either.
At current prices, gold is selling for about what it costs to produce, said Vahid Fathi, vice president of mining and metals at Kemper Securities in Chicago. If gold bullion prices fall much further, mines will have to shut down. And that should restrict supply and bolster the metal’s price.
As a result, Fathi sees opportunities for investors who might want to buy selected gold-mining stocks. Investors have to be careful, however. It is likely that only low-cost producers will survive if the price of gold continues to languish or fall further.
Companies such as Newmont Mining, Pegasus Gold, Agnico Eagle and Homestake Mining--all relatively well-managed, low-cost producers--may benefit from a drop in competition if widespread mine closures do occur, Fathi said. If mine closures don’t happen, it probably means that gold has staged a rally, he noted. And that would be good for all gold-mining concerns.
Not everyone agrees.
“There’s no hope for gold,” Kaplan countered. “All the underpinnings for a bull market are in absentia. We don’t have buying. We don’t have producers holding back. Speculators are dumping. There is a pervasive attitude of pessimism.”
Moreover, he added: “Why buy a metal that isn’t likely to appreciate and doesn’t pay interest? You might as well buy a blue chip stock that has bottomed out and get the dividend.”
