Good as gold - gold market; BV Capital director of international equities John Brimelow - Gekko's Guide to Prosperity - Cover Story - Interview

National Review, Feb 6, 1995

National Review: Could you sketch a quick picture outlining the basic structure of the gold market in the last few months?

John Brimelow: In the first quarter of 1993, the market pulled up sharply out of a three-year slump --it had fallen from around 410 to 330. Since then, it has been flirting with the 400 mark, but has been unable to manage a sustained breakthrough. On the other hand, the market has not fallen below 372. So, the trading range lately has been rather restricted.

NR: Why is there a floor at 372?

JB: There is a tremendous--and growing--demand for gold in fabrication, e.g., for jewelry and bullion. Demand from the newly rich Asian countries is particularly strong. When gold prices drop to the 370s, gold buying intensifies rapidly and the price stabilizes.

NR: And what explains the ceiling of 400?

JB: There a several reasons. Certainly, psychological resistance is a factor. The market has attempted a breakthrough five times, and failed. In addition, after Clinton's election, concern for the economy prompted some people to buy gold. The Republican take-over of the Congress in November has allievieted economic concerns in some quarters--this has led to a gold sell-off, and reduced prices. Finally, there is speculation that central banks may be holding the market back.

NR: Why would the central banks want to do that?

JB: Two primary reasons. First, it may simply suit the budgetary and financial requirements of various states. The government authorities in place today were, in general, trained to view gold as unimportant. Accordingly, they do not wish to have their assets tied up in gold. As a result, when gold prices rise some governments unload gold, and any upward momentum of gold prices is cut off. Second, central banks are sometimes concerned that rising gold prices threaten confidence in other markets. If investors see that gold is rising, they will conclude that there must be something wrong with other markets. As they sell stocks and move into gold, gold goes up, stocks go down, and there is the potential for a self-fulfilling prophecy.

NR: If various forces are holding the market back, what are the forces driving it forward?

JB: General problems associated with the world economy--e.g., in Mexico, Russia, and even the U.S.--are certainly a factor. But the main force is the great demand for gold in fabrication. Historically, gold production has always exceeded fabrication demand. Now, just within the last few years, this demand has outstripped supply, causing great upward pressure on the price.

NR: Is it likely that gold will go above 400?

JB: Yes. Central-bank reserves are diminished, producers are sold forward, and election-related selling has basically played out. The pressure on the ceiling is intensifying, and it seems that it is just a matter of time, until the market breaks through.

NR: If it does, where will the market go?

JB: If and when it gets through, speculators will jump in and the market should go to anywhere between 409 and 420. If those levels are sustained, the market will begin a rise to 500. At 500, the demand for fabrication should have fallen off enough that supply will be able to meet it. Prices would then level out.

NR: Are you saying that gold price is mainly determined by the supply-and-demand ratio?

JB: No. The price of gold is determined by global aggregate wealth. But as that wealth increases, as it has dramatically increased in Asia over the last few years, demand for go]d--in fabrication and bullion--increases as well. So, demand is a reflection of aggregate wealth. As far as supply is concerned, the amount of gold in the world is essentially static. Mining produces only a tiny fraction of gold compared to what is already above ground.

NR: Is there any chance that we'll go back on the gold standard?

JB: That is a political, not a financial, question. As a guess, the authorities will resist giving

NR: Thank you.

Mr. Brimelow is director of international equities at BV Capital.