February 1998

Precious Metals: News



The threat of a gold reserve sale prompts pricing plummet


Gold prices melted in the fourth quarter of 1997 following news of Switzerland's plan to sell from its vast gold reserves.

Prompted by the Swiss plan, gold plunged to $307.90 an ounce in November. Prices plummeted even more in December - below $283 an ounce - after a Bank of England official said the planned European Union central bank is unlikely to hold large inventories of gold in its reserves. Until December, gold prices per ounce had not dipped below $300 since early 1985.

Though the Swiss proposal still needs to be approved by the nation's parliament and voting public, its ratification could release 1,400 tons of gold, 54% of its reserve, onto the world market. That amount is roughly equivalent to seven months of worldwide mine production. Switzerland holds the third-largest central bank reserve and has long embraced gold as a way to stay above the fluctuations of world currencies. If the proposal is approved, gold from the Swiss reserves would enter the market in 1999 at the earliest.

Gold prices have been weak forseveral years, so news of the Swiss sale made investors even jumpier. Jewelry retailers are insulated from all but the most radical price fluctuations, so the drop in prices will have little immediate effect on product pricing, say observers. If you search, you might be able to get a few bargains. "American suppliers are inflexible about price," says Bill Nusser of Hands Jewelers in Iowa City, Iowa. "European companies are a little more flexible. That has allowed us to take advantage of some lower prices this year, and we're getting a better margin."

Strong Outlook

The factors that cause gold prices to drop in the world economy may trickle down to consumers and change their buying habits, though observers say the outlook for gold is still strong. The CPM Group, an industry analyst in New York City, estimates U.S. jewelry demand rose an estimated 5.7% to 7.1 million ounces in 1997.

Industry analysts expect a turnaround in gold prices this year, as real economic growth is expected to ease from 1997 levels, signaling a possible slowdown in consumer spending.

Gold prices tend to negatively reflect such economic indicators as the Dow Jones Industrial Average - so good years on the stock market (and, by extension, the affluent buying public) usually equal bad years for gold prices. Because the Dow has been strong in recent years, there's been no incentive for investors to look beyond stocks to commodities. However, given the volatile nature of the stock market during the autumn of '96, it was surprising that gold prices didn't rise as the Dow fell. Many investors hoped the price would rise, but were disappointed as stocks and commodities took a beating.


- by Liz Smutko

Copyright © 1998 by Bond Communications.


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