Gold Soars on Move By Central Banks September 28, 1999 – Posted in: Press

By PETER A. McKAY and MICHAEL M. PHILLIPS
Published: September 28, 1999
Wall Street Journal

It has been a long time since the phrase “good as gold” has had a ring of truth. But Monday came close.

The metal’s value skyrocketed $14 an ounce to $281.80, hitting a five-month high on news that 15 European central banks won’t unload extra gold onto the market for the next five years.

Analysts said the unexpected move virtually erased the biggest specter that has been scaring investors away from gold for more than a year — a seemingly endless string of rumors or announcements that government gold sales could flood the market.

But now, after hitting several new 20-year lows over the summer, gold has made a sharp turnaround. In the past two weeks including yesterday, the metal has risen by $24.90, or almost 10%. Gold still is below the $300 level it traded at almost a year ago, but analysts and traders said Monday that the metal’s price could now hit that level by year end as investors move away from their bearish futures bets.

“This is a serious change in sentiment; we haven’t had anything like this in a long time,” said metals analyst Matthew Ford, of the fund U.S. Global Investors Inc., San Antonio, Texas. “This has the hallmark of being a … sustainable run, because you’ve effectively discounted much of what the negative speculation was.”

The announcement by government banks came at a time when gold prices had become particularly politicized, analysts and traders said.

Leading the charge in support of higher prices was the World Gold Council trade group, which rallied African officials to oppose official sales, sponsored aggressive advertising campaigns and commissioned polls showing citizens’ support for their governments’ holding more of the metal.

Monday, council officials said the European banks’ announcement could fundamentally change their strategy in the coming months.

“In light of what’s occurred in the last nine months, we’ve been put a little on the defensive,” said Michael Barlerin, the World Gold Council’s chief executive for Western markets. “I don’t sense that some of the programs that we’ve been running will need to have the same tone now. For example … I don’t think it’s going to be necessary to continue the significant adversarial role we’ve had to the Bank of England decisions.”

In the announcement late Sunday, the European Central Bank and 14 individual nations said they wouldn’t sell or lease any more of their own gold holdings, beyond previously scheduled transactions such as the Bank of England’s plan to gradually sell 400 tons of the metal.

Monday’s price rally on the Comex division of the New York Mercantile Exchange built upon a rally that began last week when the second installment of the Bank of England’s auction showed increasingly bullish producer sentiment toward the metal.

However, such government gold sales have generally been almost poisonous to gold’s value. Even after Monday’s rally, the metal still hasn’t returned to its price level before the May announcement of the British sale. But analysts said the weekend’s European announcement was unprecedented both as an affirmation of official bullishness toward gold and as a sign of consensus among a usually fractious group of national banks.

“Gold will remain an important element of global monetary reserves,” the central banks said in an announcement presented by European Central Bank President Wim Duisenberg. “The current situation is characterized by uncertainty and that uncertainty by itself led to a lot of volatility and a downward trend in the gold price.”

The European announcement came at a time when bank officials were gathered in Washington for the International Monetary Fund’s annual meeting. The IMF itself confirmed over the weekend that it had nixed plans to sell 10 million ounces of its own 103 million ounce gold reserve on the open market to raise money to provide debt relief for poor countries.

Instead, faced with industry and congressional opposition, the U.S. Treasury and the IMF engineered a complex new plan in which the IMF will boost the book value of 14 million ounces of gold, then use those resources to help developing countries cut their debts to the IMF.

Analysts said the series of announcements generally reflected the realization by governments and producers that gold had bottomed out, perhaps artificially in an overzealous response to speculation about official sales.

Amid the general euphoria Monday, however, some analysts were cautious to warn that the latest reversal, spurred largely by a wave of new producer and fund buying, will eventually have to rely on more substantial economic developments to sustain itself.

In particular, the yen will have to remain strong against the dollar because Japan is such a large consumer of gold, said George Gero, first vice president at Prudential Securities in New York.

“As far as I’m concerned, the jury’s still out on this rally,” he said. “This sort of event focuses attention on gold a lot more than a short-term disaster, war or assassination. Gold is, after all, an economic haven. But its value is ultimately more tied to economic events than political ones.”

The rise in gold prices buoyed several gold-mining stocks Monday, most notably Newmont Mining Corp., which rose $4.875 to $27.8125, and Anglogold Ltd., which rose $5.4375 to $34.375 in New York Stock Exchange composite trading.

But despite Monday’s price spike, Newmont, based in Denver, for now plans to hold onto a bearish options hedge it recently opened on 2.35 million ounces of gold through 2009, said Chief Financial Officer Bruce D. Hansen.

“Right now we’re definitely trying to stand back for the market and digest what this means in the short term,” he said. “It’s still a tough market to do anything from a producer standpoint.”

Analysts Monday expected most mining companies to remain similarly cautious and said they were unlikely to launch new mines, as the latest gains may evaporate by the time the five-year to seven-year start-up time for new mining projects has passed.

One effect the price boost may have, however, is higher jewelry prices, said estate jeweler Tobina Kahn, whose family-owned firm received 10 calls at its offices in Chicago and Palm Beach, Fla., Monday from customers wanting to sell gold jewelry.

Usually, Ms. Kahn says she warns consumers that there’s less correlation than they might expect between gold commodity prices and the value of finished gold items. Monday was a different story, though.

“The average gold investment is going to be worth perhaps three times more,” she said, referring to the kind of family heirlooms her firm usually buys. “This affects the price of anybody who has any type of gold jewelry that has any significant weight of gold to it. We’re talking about the kinds of everyday items that people have sitting in a collection somewhere.”

In addition to the European Central Bank, the following individual countries agreed not to sell or lease additional gold over the next five years: Austria, Belgium, Britain, Finland, France, Germany, Italy, Ireland, Luxembourg, Netherlands, Portugal, Spain, Sweden and Switzerland.