GFMS bullish on gold despite early stumble (January 13, 2005)

Despite a slow start, metals consultancy firm Gold Fields Minerals Services expects investors to lead the charge to an average gold price of US$447 per oz. during the first half of 2005.

U.K.-based GFMS says that while the price of gold should break through the 16-year high of US$454.20 dollars per oz. hit in early December, it will not likely reach the 1988 high of US$483.90 per oz.

During a recent presentation of the second update of the 2004 Gold Report in Toronto, GFMS’s mine production and hedging specialist Bruce Alway said that any dips below the US$420-per-oz. mark would be limited during the first half. Alway also said that a shift in investor psychology means that such dips would likely be viewed as buying opportunities.

The case for sustained investment is based on GFMS’s forecast of continued dollar weakness, low interest rates, the threat of inflation, and the U.S. fiscal and current accounts deficits. In all, GFMS estimates that global gold investment (implied net investment, coin demand and bar hoarding) will total around 362 tonnes, or US$5.2 billion, during the first six months of 2005.

Always also explains that there is even more upside when one considers that institutional investors have yet to more than “dabble” in the market. Always figures that a “small shift in the allocation of institutional funds” could trigger a significant rally.

During 2004, gold averaged US$409 per oz., up nearly 13% from the US$363.32 in 2003. The yellow metal finished US$3 per oz. lower at US$423.60 per oz. in the afternoon in London on Jan. 13.

Supply-demand highlights from the GFMS survey include:

— Mine production in 2004 is estimated to have fallen by 114 tonnes, or 4% to 2,478 tonnes — the biggest annual decline since the 1940s. The decrease is attributed to, in part, a pit wall failure at Freeport-McMoRan Copper & Gold‘s (FCX-N) massive Grasberg mine in Indonesia in October, stints of bad weather in the U.S. and Australia, and a strengthening rand in South Africa.

— Cash costs for the first nine months of 2004 rose by US$28 to US$248 per oz., owing to currency effects and lower production.

— Net official-sector sales in 2004 fell by 19% to 497 tonnes, mostly driven by lowers sales under the Central Bank Gold Agreement. That figure includes some 67 tonnes of gold purchased during the year (fives times that in 2003), including 55 tonnes by Argentina during the first half.

— Global fabrication demand is estimated to have risen by 4.6% to 3,179 tonnes, with every major area of gold offtake posting increases. The jewelry and electronics sectors grew by 99 tonnes and 26 tonnes. Jewelry demand is expected to drop by 6.1% in the first half of 2005, with overall fabrication demand slipping by 4.8%.

— Producer de-hedging totalled 424 tonnes, with 70% of that be deliveries into existing contracts; the balance comprises buy backs. At the end of 2004, the global delta-adjusted hedge book contained some 1,797 tonnes of gold, or about 9 months of production.

— World investment demand was more than halved to 314 tonnes during 2004. This was solely due to fall from the elevated levels of implied investment in 2003. In contrast, coin sales and bar-hoarding rose by 7% and a 34%.

— Scrap gold supply is estimated to have slipped by about 12% to 829 tonnes, despite the 13% price increase. The decrease is attributed to the anticipation of higher prices.