GFMS described gold's 1998 performance as "disappointing," adding that "1999 will not see a substantial change in either the longer-term factors or the shorter-term influences that are currently constraining the price." On last Wednesday, gold for June delivery settled at $285.50 an ounce, down 40 cents from Tuesday's close, on the COMEX division of the New York Mercantile Exchange.

On the supply side, GFMS predicts scrap flows will be lower, after soaring in 1998, but will be offset by increased producer hedging, with some big mining nationsrelatively unhedged. Forward sales actually fell by 76 tonnes in 1998, the first decline on record, while increased options hedging took up some of the slack, with delta hedging adding 107 tonnes of supply.

Hedging of future mine output added only 75 tonnes to global gold supply in 1998, less than one-seventh the accelerated supply generated in 1997. GFMS managing director Philip Klapwijk said that producers have become much more realistic about the bearish outlook for gold, accepting lower prices at which they will sell forward. The producer hedge "trigger" may now be below $300 an ounce, a potential source of resistance. "The other component there, is the fact that they have been pretty successful, including here in the US, in reducing their costs such that they can lock in quite attractive margin at successively lower gold prices," Klapwijk said.

Producers have brought total mining costs down 18 per cent and average costs have fallen to $206 per ounce. The US miners had the lowest costs, SouthAfrica's the highest, the report said. On the other hand, central bank sales are expected to be lower than the 412 tonnes of net new supply from the official sector in 1998. Last year's official sector sales exceeded the 376 tonnes in 1997 and the 315-tonne 10-year average, GFMS said. "We fully expect there to be periods during which the level of net sales could drop back to quite low levels," GFMS said. "Indeed, we think 1999 may well turn out to be such a `quiet period' due to the new situation across much of Europe, following the recent launch of the single currency."

Gold sold or lent by central banks, who otherwise realise no interest on their stockpiles, has facilitated shorting by speculators and hedgers, who borrow gold at very low interest rates, and then sell it, expecting they will later buy it back at a lower price for a profit. Investment in the west rose 260 tonnes in 1998, reversing a 271-tonne disinvestment in 1997. This 1998 short covering was largely spurred by a flight to safety afterthe US stock market crash, a huge decline in the dollar and the collapse of hedge fund Long-Term capital management.

But stocks have since recovered, with the Dow Jones Industrial Average surging over the landmark 10,000 level in recent weeks. Meanwhile, speculator net shorts on the COMEX had ballooned back to 91,960 contracts as of April 6, according to the Commodity Futures Trading Commission. "A collapse in world stock markets, followed by a substantial devaluation of the dollar, could be good for the price, but even here, the experience of August and September last year suggests only a major system meltdown would really make a difference," Gold Fields said.

The report also said that improved demand as Asia begins to recover from the 1997-1998 economic crisis could be more than offset as economic growth in other part of the world slows.