Donna Block
The bullion price has sunk to new 20-year lows amid heavy fund selling, and the barbarians are at the gate once again. Most analysts agree the short-term outlook for gold is decisively negative. Traders, speculators and hedge funds are taking advantage of that negative sentiment and keeping the downward pressure on the metal by selling it short.
The speculators borrow gold and then sell it, anticipating the price to fall before they have to buy it back and return it to the lender. According to one metals analyst, “speculators have had a huge outstanding short position for years now. They take their cues from the market and the signals being sent from central bankers.”
Over the past few years central banks have mobilised their gold reserves by lending or selling them. The nail in the coffin came on May 7 when the United Kingdom’s Treasury announced its intention to sell more than half of its gold reserves. It came as a shock to the market and the gold price plunged. Since the announcement the price has come down $20.
The UK’s sale is significant because even though it is not a large holder of gold, it is a stalwart in the global finance arena. The announcement has created an atmosphere of dread among smaller holders of gold. One economist noted that the thinking among funds and investors is, “If the UK is doing it, what’s going to happen if the Swiss do it and then the International Monetary Fund do it.”
Analysts and economists agree that sentiment towards gold has changed. The metal may not carry the same weight in South Africa’s economy as it did a decade ago, but the destiny of the mining industry is of paramount concern to foreign investors. “Foreigners still think of the South African economy as being gold dominated, so in terms of sentiment, it is not positive,” said Peter Linley, executive director of Old Mutual Asset Managers.
According to Mike Schussler, economist at FBC Fidelity, the continued pressure on the gold price will threaten the survival of some marginal mines.
But the good news is the industry has gone through restructuring, which started in 1997. This has given many South African gold mines room to manoeuvre when gold prices fluctuate. The average industry production costs have dropped to $230 an ounce from more than $300.