U.K. triggers gold sell-off
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May 7, 1999: 2:40 p.m. ET
But producers aren't worried about Treasury's plan to divest reserves
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NEW YORK (CNNfn) - Easy come, easy go in the gold market.
The price of gold tumbled almost $10, or 3 percent, to $280.20 an ounce Friday after the U.K. Treasury said it will auction off more than half of its $6.5 billion in gold reserves over the next two years, opting to stock its vaults with world currencies instead.
On the Comex division of the New York Mercantile Exchange, June gold fell $10.40, or 3.6 percent, to $280.30 an ounce, the biggest one-day drop since August 1993. Shares of gold mining producers also fell sharply.
The unexpected announcement renewed concern that governments and central
banks are competing with one another to dump their gold reserves before a flood of the precious metal drives its price even lower. It also comes less than a month after Switzerland changed its constitution to allow gold sales. The International Monetary Fund also is considering selling some of its reserves.
But that doesn't mean doom and gloom for the price of bullion or for the profits of gold producers, industry insiders say. In fact, the U.K. Treasury's decision to auction part of its holdings will help bullion trade, said Vince Borg, spokesman for Toronto-based Barrick Gold (ABX), the fourth-largest gold producer in the world and the most profitable.
Removing the uncertainty
"We've been calling for transparency in the gold market for some time," Borg said. "The process (the Treasury) indicated it will sell the gold by is an auction process, which will introduce more certainty in the market."
Under its plan, the U.K. will auction off 125 tons of gold, or 3 percent of its reserves, during the year ending March 31, 2000, and reduce its overall holding to 300 tons over a three- to five-year period. It plans to hold five separate auctions of 25 tons each starting this July.
Contrary to traders' reactions to the announcement, the process actually will help improve the flow of bullion and "will replace the uncertainty that's dominated the market in the past few years," Borg said.
That's because buyers and sellers will know exactly how much gold will be added to existing supply ahead of each auction, which in turn will allow them to better judge what the appropriate market price for the bullion should be, Borg said. In other sales -- Canada's, for example -- traders had to guess roughly how much bullion was going to be released by the central bank and then determine what the gold was worth. The Bank of Canada publishes the amount of gold it sells each month in a report released long after the fact.
The sharply negative sentiment toward gold Friday contrasted with the outlook for bullion earlier in the week, when analysts and investors deemed the precious metal to be back in vogue.
The price of gold Thursday rose above $289 an ounce for the first time in more than a year on optimism that gold prices had seen their worst days and that inflation may be on the rise. Investors typically purchase gold as a hedge against inflation because it's considered the safest and least volatile of investment during periods of economic uncertainty.
As far as the dramatic price drop goes, "We faced this reality a few years ago," Borg said. Barrick's production costs currently average $125 an ounce. It's sales, however, average a little higher than that; the company currently is selling its gold at $385 an ounce, three times the cost of production.
Weathering the storm
So far Barrick has managed to weather the past year's ups and downs of gold prices quite nicely. The firm earned a record $87 million, or 23 cents a share, in the first quarter, a 16 percent gain from the year earlier and 2 cents more than analysts' expectations. Revenue rose almost 30 percent to $392 million from $305 million. Operating cash flow increased 56 percent to $210 million, or 56 cents a share, from $135 million, or 36 cents, in the year-earlier period. Gold production rose 31 percent in the quarter.
To be sure, investors weren't focused on Barrick's stellar performance Friday. Its stock fell 2-3/4 to 20-1/2 alongside most other gold producers. Other gold producers' shares declined as well. Anglogold (AU), the world's biggest gold producer, fell 1-3/16 to 22-5/16. Newmont Mining (NEM), in the No. 2 spot, fell 4-1/2 to 21 while Gold Fields (GLDFY) American depository receipts dropped 5/32 to 1-27/32. Gold Fields is the third-largest producer by 1998 output.
Still, "it's not the end of the world," said Borg. "There's a deficit between the amount of gold on deposit and the amount in demand," particularly among jewelry producers. Strong economic growth and robust consumer spending have boosted demand for high-ticket items such as jewelry, he said.
"Gold has been around since the time of Cleopatra and it will continue to be around. This is a very good business and we'll be able to benefit in this kind of environment."
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