Oversupply and low inflation take shine off precious metals

Metals analyst William Siedenburg receives hundreds of prospects on gold companies and gold-mining techniques. ``I get so many papers describing moose pastures,'' says the Smith Barney, Harris Upham & Co. analyst, with a laugh. ``I fill my wastebasket daily with stuff on gold.''

These papers, at least for now, provide Mr. Siedenburg with a diversion from otherwise quiet metals markets, when he's not studying gold-producing companies. The prices of gold, silver, and platinum have dropped recently, for a handful of reasons. With gold, too much supply has come on the market in the last two months. In the case of platinum, the political situation in South Africa has been relatively calm. South Africa produces roughly 60 percent of the world's platinum supply.

``The gold market peaked in December,'' hitting $500 an ounce, observes Alan Posnick, a senior vice-president at MTB Banking Corporation, international foreign-exchange dealers in New York. ``There's not a lot going on. There are overwhelmingly bearish sentiments for gold. It's dull.''

Mr. Posnick says gold exporters expect one of two price scenarios in the next few months: Either gold will drop to about $350 an ounce, or the market has hit its bottom at $420 and will climb.

Gold prices, traditionally a barometer of inflation expectations, have been affected by a halt in the dollar's slide, low oil and energy prices, and little threat of inflation, Posnick says.

``Inflation is the biggest concern,'' he explains. ``Inflation will return eventually, and then you'll see a much stronger interest in precious metals.'' Investment advisers usually recommend that precious metals make up from 5 to 10 percent of an investor's portfolio as a hedge against inflation.

The price of gold dropped in the last two months or so because of a tremendous addition to the supply, which was too great for the market to absorb. Australian and American gold producers ``sold forward,'' selling gold that has not yet been produced, to hedge against falling prices. They locked in a profit by selling their gold in the high $400s; lately, gold has been selling in the $430-to-$445 range.

``The forward selling has had its major negative influence,'' says Jeffrey Nichols, president of American Precious Metals Advisors Inc. in New York, ``because the gold produced later in the year has already been sold, so it won't affect the price.'' He estimates that aggressive forward selling added 1.8 million ounces to the supply. The annual supply from all sources is between 60 million and 65 million ounces, he says.

Also, Newmont Mining Corporation said last month that it borrowed 1 million ounces of gold, which it then sold to pay debts taken on to fend off a hostile takeover attempt.

A third factor affecting gold prices was the gold the Soviet Union and Peru put on the market. In the case of the Soviet gold, Mr. Nichols says it was seasonal selling, which has occurred for the last two years.

The tremendous supply wouldn't hold the price up, particularly after the stock market plunge, says John Norris, of Citibank's precious-metals center. He says the gold market appears to be stabilizing.

``But is it a correction in the bull market or the start of the bear market? These days nothing is certain, but there doesn't appear to be any big change in the economy coming six months from now,'' he says. ``All the factors point to a fairly stable market.'' He predicts gold will trade in the $430-to-$440 range in the short run.

Nichols thinks the markets have probably seen the low prices. ``The markets are poised to recover,'' he says. ``The optimism about the growth in the equity markets was a bit overdone, and we're moving to a more realistic picture, which is mildly positive for gold.'' He says gold might reach its recent high of $500 later this year.

Major activity in gold buying is now occurring in Asia. ``The area is experiencing a tremendous surge. It's really astonishing,'' Nichols observes.

In February Japan imported 40 tons of gold; in January it had imported 10 tons. In 1987 the monthly average was 19 tons.

Hong Kong, Taiwan, and Singapore have also been aggressively buying, expressing what Nichols says is a cultural affinity for gold. ``The area has become a sponge. It soaks up the supply,'' he says. ``They are attracted by the low prices, they have loads of money and high savings rates, and prices won't go any lower.''

The prospects for silver and platinum, considered industrial metals, remain flat as well, says Siedenburg of Smith Barney. These two metals took a particularly heavy beating after October's market collapse, because of concerns there might be a recession. In such a case, demand for industrial metals would drop. Silver is selling at about $6.25 an ounce.

Silver benefits from a strong exporting economy, says Mr. Norris of Citibank, because of its industrial importance.

``People are keying to the trade deficit numbers, or at least an improvement in exports, which is important for gold and silver,'' he says. ``The improvement seems to be a trend.'' He expects silver in the near term to sell between $6.25 and $6.40.

``There's too much silver around now, and in the case of platinum, it's pretty much a function of what goes on in South Africa,'' Siedenburg adds. Platinum is a critical material that cannot be substituted; it is used in catalytic converters in autos, among other things.

``The pressure on platinum has subsided, and there is very little that suggests any big new demand. I look for prices to remain flat,'' Siedenburg says.

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