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GFMS Gold Survey Suggests Price Should Go Higher
Source: FN Arena News - April 05 2007
By Chris Shaw
Industry consultants GFMS have released their Gold Survey for 2007, the document's key theme being the potential for the gold price to continue pushing higher both this year and into 2008.
According to group chairman Philip Klapwijk, the 2007 outlook is such the record average gold price mark of US$614.50 per ounce set back in 1980 is likely to fall this year, while it wouldn't surprise if the market was able to move above its 2006 high of US$725 per ounce.
While moving beyond the record high of US$850 per ounce is a more difficult proposition, Klapwijk sees no reason for the metal to not post further gains into 2008.
The group expects investors to be at the forefront of the push to higher prices, even though the data for 2006 is not suggestive of such a trend. As Klapwijk notes, the official figures show investment in the sector actually fell last year from 2006 levels, official figures indicating total world investment in the sector was 743 tonnes. In volume terms this equates to a fall of 13% but in value terms it represents an increase of 14% to US$14.4 billion. As Klapwijk points out, the market is now a new structure as it has moved from a buy side only structure to a more two-sided model and total investment shows little sign of falling.
Nor should it in the group's view, as the reasons why investors would be positive on the gold price outlook remain the same – the potential for a weaker US dollar and a slowdown in the US economy, the threat of higher inflation and increased geopolitical tensions.
Supporting this is an argument based on weight of money, as the group notes total non-commercial investment across a number of commodities stood at only US$138 billion as at the end of last year, meaning there is scope for this to increase significantly going forward. Helping here is the fact central banks aligned to the Central Bank Gold Agreement (CBGA) are not meeting their annual sale quotas, which is helping to tighten the market.
Also tightening the market is ongoing producer de-hedging, which the group points out quadrupled last year to more than 370 tonnes, 76% of which occurred in the first half of the year. While matching last year's level appears a difficult task, GFMS expects de-hedging to remain at elevated levels through the year with a total of more than 300 tonnes considered likely.
The impact of this de-hedging is significant, as the group notes last year's numbers mean the total of outstanding forward sales, loans and hedges against options positions stand at 1,364 tonnes, a level not seen since 1994.
Looking more closely at the supply side presents a similarly bullish picture, as the group notes global production fell by 3% last year to a 10-year low. At the same time global cash costs pushed higher, increasing by around US$45 per ounce on the back of higher energy and labour costs and consumables charges.
Asia accounted for the largest portion of the decline, this despite China lifting production by around 8%. More modest falls were recorded in North American and African output, while Oceania production was down by 21 tonnes. This year should see something of a reversal, the group expecting a 1-2% increase in total production as new mines come on stream and production is ramped-up at existing operations.
The fall in output was matched by official sector sales that halved to around 328 tonnes, the lowest level since 1997. While the large central banks played the major role in this decline, the change from seller to buyer by a number of smaller central banks also contributed. Offsetting these supply declines was a 25% jump in scrap metal sales, which rose to more than 1,100 tonnes.
The demand side of the equation, and in particular the demand from the jewellery sector, suffered through 2006 as the market adjusted to higher prices. Total jewellery fabrication fell 16% or 428 tonnes to 2,280 tonnes, a 15-year low. It was a tale of two halves though, as 1H06 fabrication was down 30% and 2H06 posted a small increase. Other fabrication demand actually increased by around 10% in 2006.
The largest falls in terms of jewellery demand came in key markets such as India and Turkey that are traditionally price sensitive, while demand in the US was also lower. Higher prices also drove down buying from the Middle East, helped by higher levels of scrap supply. GFMS estimates the total volume of old jewellery being scrapped increased by 112 tonnes or 34% year-on-year, while in Saudi Arabia local scrap volumes rose 44% year-on-year.
The group suggests with its positive outlook for the gold price jewellery demand could contract further this year, but any decline is unlikely to be as big in percentage terms as was the case last year.