Tourists, falling prices, and the paradox of gold

The North Leader gold vein near Johannesburg has been surrendered to tourists.

It isn't a rich vein. It takes a metric ton of the rock there to produce just three grams of gold. With prices falling, it became unprofitable to dig.

So managers of the vein, owned by Blyvooruitzicht Mine, turned the area into a tourist stop where visitors can watch black miners mimic the activities of a working mine.

Circumstances at the North Leader are a very visible example of the downturn in the world gold price since 1980. In South Africa, the noncommunist world's largest producer of gold, the gold price slide has drastically reduced foreign exchange earnings and sharply slowed the economy.

For miners and nonminers alike in this country, jobs are fewer and the standard of living is falling.

Although results of the falling gold price are straightforward, causes are not. In its annual survey of the gold market, Consolidated Gold Fields of London suggests investors should be wary of bullion in 1982. The gold market, it notes, remains a paradox.

If gold were valued simply as a commodity governed by supply and demand, conditions would be ripe for a price rise. Fabrication of new gold into jewelry, coins, and industrial products in 1981 exceeded the supply of gold for the first time in nine years. The supply shortfall is made up by purchases from private investors who sell gold and by recovery of gold from scrap.

At the same time, hoarding of gold by those who use it as a medium for savings reached about 280 tons--the highest ever recorded in a Consolidated Gold Fields survey.

''For 1982, all the signs so far indicate that demand for fabrication and bar hoarding is running at still higher levels,'' the report adds.

But even with more gold under mattresses and around necks, the world price of bullion continues to slide. From a peak of $850 per ounce in 1980, the price last week hit its lowest level in three years, $317.60.

The reason for the disparity is that gold is perceived as more than just a commodity. Large investors and speculators buy and sell gold to make money. Their decisions on gold take into account world economic and political circumstances, which make the gold price a barometer of sentiment as much as a reflection of the narrower circumstances of the gold market.

Large-scale investors were pessimistic about gold in 1981, selling off an estimated 330 tons. The collective decisions of these speculators and investors carry great weight in fixing the gold price. As the report notes, ''The fundamentals of physical supply and demand alone have insufficient influence to counterbalance opposing investor sentiment, in the short term.''

What seems to be happening now is that each time the price of gold rallies, supported by fabrication and hoarding demand for bullion, investors and speculators sell at the higher price to make a profit. It is only when large investors gain enough confidence in the gold market to make long-term commitments that the price will sustain a steady recovery, the report forecasts.

The report states that the gold market has probably ''either bottomed out, or is close to doing so.'' But this does not necessarily mean the gold price will improve soon. Large investors must first be drawn back into gold - and for that to happen interest rates must fall, inflationary expectations must increase, and the gold price must stop being knocked down by profit-takers each time it rallies, the survey says.

It is widely believed that current high interest rates in the United States offer international investors a more attractive return on their money than on gold. It is also believed that lower US inflation weakens interest in gold, where investors take refuge in periods of rapidly rising prices.

The gold market has been increasingly volatile, partly because of the growing use of computers by dealers and instantaneous communications worldwide. World events are known almost immediately and investors' perceptions of those events influence the gold price rapidly.

In some respects then, ''herd instinct'' affects gold. The report notes that this makes trading difficult for those holding differing views from the majority.