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HIGHER DEMAND, TIGHTENING SUPPLIES COULD RESTORE LUSTER TO GOLD PRICES

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Tightening supplies of gold could lead to higher prices in the 1990s, according to an annual survey published this week by a leading gold producer.

The report, by Consolidated Gold Fields, noted that the price of gold has failed to move spectacularly since the Soviet Union invasion of Afghanistan lifted bullion in January 1980 to an all-time high of $850 an ounce. But it said the metal may regain some of its luster this year as supplies tighten and demand improves."1989 was another record year for the gold market in virtually all respects but price," the survey said.

Although mine production in the West should rise modestly in 1990, Gold Fields predicts growth will lag behing the 7 percent increase in 1989 when supplies from mines were at a record 1,653 metric tons.

It said that Western supplies rose to 2,723 tons in 1989, 4 percent above 1988. Apart from Western mine production, other main supply sources were sales by central banks and the Soviet Union and from old or recycled gold scrap.

Production growth was dominated by the United States, Australia and Canada, whose combined output overtook South Africa for the first time since 1911.

South African production last year fell 2 percent to 608 tons due to a decline in the quality of its gold grades, but the country still provided a fairly significant 37 percent of the Western world's supply.

Gold Fields said that future gold sales by central banks and lending of gold will be more cautious following the collapse of the New York brokerage firm Drexel Burnham Lambert, whose creditors include central banks which had lent gold to the company.

While Moscow remains under pressure to sell gold for essential foreign exchange needs, actual output from Soviet mines, the second-largest producer after South Africa, may decline in the present economic crisis.

A gold-backed ruble for use in foreign trade and the domestic issue of gold-backed bonds to soak up the enormous ruble overhang have been widely debated, the survey said.

But in practice an alternative strategy, in which the Soviet Union would initially use its gold reserves as a collateral for swaps is considered more likely.

The Soviet Union's net sales reached an estimated 296 tons in 1989, up from 263 tons in 1988.

Italian gold imports, used primarily in jewelry rose in the early part of the year over the same 1989 period. Although weakening consumer spending makes a repeat of the pace of demand in the past three years unlikely, "jewelery fabrication will remain the cornerstone of the gold market," Gold Fields said.