Commodities & Futures: Few silver linings for gold

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The Independent Online
THE ROUT in the precious metals markets last week has left investors and traders wondering what hit them. A month ago, gold looked a good investment for the recovery (whenever that may be). By last week analysts were saying, 'It was falling so fast even a mug wouldn't touch it.'

What happened? There was no shortage of explanations for gold's dollars 15 slide during the week to dollars 336 an ounce. Low inflation, recession in industrialised countries, economic indicators, Australian producer selling, technical selling by US investment funds, the receding threat of South African mine strikes, Japanese stock market weakness - all were a reason to sell gold.

While all of these factors may have contributed, jitters about demand for platinum, a sister metal to gold, were at the root of the sell-off. During the week it lost dollars 36 to close on Friday in London at pounds 345.75. Silver mirrored the fall, closing down 10 cents on the week at dollars 3.92.

Stewart Murray, chief executive of Gold Fields Mineral Services, said platinum's two main markets, autocatalysts and jewellery demand from Japan, were both suffering from recession and slowdown.

Gold has also been sold for ready income by wealthy Japanese individuals and corporations as the Tokyo stock market falls.

On the production side, a sustained strike in South Africa, which looked certain two months ago, seems less likely now.

'Sentiment changed toward platinum, and that got the ball rolling,' Mr Murray said.

The strong psychological link the markets make between platinum and gold - based on their similarities in price, origin and jewellery use - caused sympathetic selling in gold that spilled over to silver.

The speed of gold's dive can be attributed to the large US computer-driven funds that have invested in metals in the last few months for the favourable return.

The funds bought gold and other metals because their computers spotted the market hitting bottom, based on technical chart patterns, moving averages and other signals. But the computers balked at a dollars 360-an-ounce gold price, and the funds couldn't bale out fast enough.

'The funds pulled out of gold much faster than they got in,' Mr Murray said.

Gold-buying psychology was also affected by the announcement on Tuesday by De Beers, the South African diamond producer, revising down its view of diamond market prospects and predicting a final dividend cut.

'People became nervous about the market for gems and jewellery, when De Beers, which takes 10 sightings a year of these markets, sent this warning signal,' said Jon Bergtheil, metals analyst with stockbroker James Capel.

The outlook for gold prices in the medium term is perhaps less grim than some experts believe. But its fortunes depend on that elusive recovery in industrial economies.

An eventual rebound in gold could be linked to investment demand, which has waned over the past three years while the metal price has been in the doldrums.

Investors sold 250 tons of gold last year, mostly to the jewellery trade in the Middle East and South-east Asia. But jewellery demand in the West has been relatively subdued.

Mr Bergtheil predicts that demand will pick up when Western economies recover, inspiring investors to hold gold rather than sell it. By next year, supplies could become tight if mine production, which has been cut back, does not crank up again.

'If the G-7 economies stabilise, we could be into a really interesting situation in the gold market,' he said.

Over the next 18 months, he is more circumspect, and will only predict that gold could hover quietly between dollars 325 and dollars 355 an ounce for at least five months before making a move up or down.

'We don't believe that gold is in a freefall to dollars 295 an ounce because production costs will be so far above the price at that level that the industry won't survive,' Mr Bergtheil said.

(Graph omitted)