Can the gold market build on its Lazarus act of September/October this year and start the new millennium entering a new bull phase?
A strong rally in gold prices would revive Australia’s jaded junior exploration sector and rekindle sharemarket interest in the entire mining patch.

On the face of it, the gold bulls’ prayers were answered in late September when the European Central Bank announced it would tighten gold lending. The shock announcement catapulted gold prices from about $US255 per oz to $US338/oz in a matter of days. But by late November, the mini-rally had diluted somewhat as prices trickled back to the $US290/oz level.

Broker HSBC believes gold will average $315/oz in 2000 despite market volatility.

 

Unlike base metals and bulk commodities, gold prices in 2000 will not necessarily respond to stronger world economic growth.

“True, a recovery in growth should boost disposable incomes and, as a result, gold demand,” said the stockbroker HSBC Securities in a research report. “However, gold prices are largely determined by supply side issues — producer hedging, central bank sales and fund short selling.”

London-based HSBC forecasts gold prices will be highly volatile in 2000, yet still manage to average $US315/oz.

What are the sentiments of Australian industry figures? Most that Australia’s Mining Monthly interviewed were bullish, though one was aggressively bearish.

“While we have seen gold kick upwards by about $US50/oz, I think we’ll see it under pressure in the next 12 months and under serious pressure in the next five to 10 years,” said Max Brunsdon, general manager, commercial, at Western Metals.

“Being an economist, part of me is still a fundamentalist, believing in the laws of supply and demand. I struggle to convince myself about gold. It will lose its preciousness very quickly,” he said.

Brunsdon added that the traditional triggers that used to send the gold price skywards such as high inflationary environments, military conflicts, political instability and insurrection no longer had any significant impact.

His thoughts did not go down very well with the gold bulls.

“Gold’s weakness is pretty well a function of the economy we are living in — the strong US dollar and unmitigated faith in paper currencies,” said John Macdonald, a mining analyst at CIBC World Markets.

“We could quite easily see a return to a type of currency that doesn’t rely on any one country’s economy. The US dollar is not necessarily going to remain strong. The end game may not be gold at all, just a different system that may or may not have gold as part of it. In the meantime, you may see a strong shift back towards gold.”

A key driver of the gold market is lease rates, or the cost of borrowing bullion. During the recent rally, lease rates soared to double-digit figures. They then quickly retreated back to around 2% as the high rates sucked gold out of bank vaults. Australian miners and short speculators rely on low lease rates to profit from the “contango” between gold borrowing costs and bank bills. If lease rates strengthen again — a possibility in a tighter market — it could spell trouble for Australia’s heavily hedged gold miners.