Leap in gold price 'a flash in the pan'

GOLD last week jumped to more than $400 (pounds 258) an ounce for the first time since August 1993. It had been stuck between $350 and $400 for the past three years, and the market celebrated.

So is gold really poised for a comeback? Or is this only a temporary blip in its long-term decline as an investment asset? Since it peaked in spectacular fashion in 1979 at more than $700, it has been stuck in the doldrums. Analysts say the recent surge was sparked by a return of US investment funds, whose managers felt the price did not reflect the underlying supply-and-demand situation.

Since the early Eighties, however, gold's price has been capped by increasing forward sales by the producers. This involves mines selling intended production to bullion banks, which are guaranteed a price. Bullion banks also borrow metal, usually from the central banks, to sell into the spot market.

Recently, analysts have been excited by improvement in gold demand for jewellery, mainly from India and the Middle East. "There is record physical demand, so this has been a good time for speculators to re-enter the market," says Paul Walker, at the consultant Goldfields Mineral Services, whose yearly review is the bible of the industry.

But Andy Smith, gold expert at Union Bank of Switzerland, believes the latest rise is a flash in the pan. "There's talk that the world financial system is on its knees, with the threat of the budget standstill in the US. It is extremely unlikely that that won't be resolved, which brings the risk of huge disappointment to gold speculators."

Central banks, who play a key role in the market, also take a more pragmatic, and less mystical, view. Mr Smith maintains there is no data you can trust: "It's a sentiment-driven market much of the time. It often says not very much - 'It's the Chinese, it's the Middle East' - but ultimately you don't know."