Regaining Some Shine

International gold prices seem poised to touch the magic $300 (per troy ounce) mark, as central banks across the globe realise that there is virtue in moderation. And, value in gold. Specifically, the European Central Bank, representing 11 national central banks, the Bank of England and the central bank of Switzerland, have decided to cap their annual sales to 400 tonnes over the next five years. What's more, the ECB said gold would remain an important part of global monetary reserves. That single statement has done wonders to soothe the frayed nerves of other central banks around the world, which had started following the Australian and the Swiss central banks in selling off gold assets.

Earlier last week, the International Monetary Fund (IMF) decided not to sell the 10 million ounces (312 tonnes) of gold that it had planned to in order to finance the debt relief package for the poorest nations.

Instead it decided to revalue the gold assets in an accounting exercise: IMF will make a fresh loan to the countries in the form of gold, and the countries will immediately return it as repayment of its earlier loans. In the IMF's books, the gold will stand revalued (at current prices), while the debtor nations' debt will stand renewed. As a result, gold was quoted at $288.25 in London trades yesterday, up from the $255 at the beginning of the month.

Local gold prices, too, have reacted with enthusiasm. More so, because the turnaround in fortunes comes ahead of the festival buying season.

So far so good. The upsurge in prices has given all central banks -- the largest holders of gold assets -- time to reflect on the metal. But analysts doubt if the good times will last. For one, the demand for gold assets is part of the larger bull run in oil.

With the Organisation of Petroleum Exporting Countries firm on not restoring the production cuts even after March 2000, oil prices may continue to remain high for a time. But how long? The Bank of England is said to have been surprised at the response to its gold auction (of 25 million tonnes) last Tuesday. That single event, in fact, sparked off the current rally. Much therefore depends on the future of oil prices.

Technically, speculators who had sold the metal short -- ahead of the central bank auctions -- are still sitting on huge positions. A World Gold Council report estimates the short positions at 230 tonnes, which is almost half the planned annual central bank sales. On that count, there is no respite. The resurgence in gold demand is consequent to recovery in troubled economies. Gold demand in India in the April-June 1999 period was estimated at 218 tonnes, up 6 per cent over the corresponding quarter of the previous year.

Resurgence in the Taiwan economy led to a 6 per cent growth in the China, Hong Kong and Taiwan region but Taiwan has been hit hard by the earthquake. Elsewhere in Southeast Asia, gold demand has reverted to pre-crisis levels. But excess mine production (especially in Australia) continues unabated. Clearly it is a knife edge situation: there is a temporary revival in demand but supply in the long run will remain a matter of real-politik.