Gold’s Fundamentals Still Strong

Probably the most encouraging news for miners during the week ended Jan. 17, the second trading week of 2009, came out of GFMS’s newly tabled supply and demand statistics for the gold market, and its bullish view for gold going forward.

• Thanks in part to its extensive year-round efforts chasing down gold data from around the world, the London-based gold consultancy has consistently been one of the decade’s best prognosticators of the gold price.

While it says gold’s fundamentals are “relatively neutral” in the near term, GFMS predicts that spot gold prices will average US$915 per oz. and trade within a range of US$750 to US$1,080 per oz. during the first half of 2009. In other words, Philip Klapwijk and his staff at GFMS think gold is poised to hit another all-time nominal high before mid-year.

The arguments for gold prices to go higher have been hashed over for years, and still hold true in this slow-moving game, which saw the spot gold price rise only 3% in 2008 despite its rather wide trading range of US$299 per oz. during the year.

On the supply side in 2008, gold mine production dropped 3.6% to 2,385 tonnes gold (76.7 million oz.) while total supply (including scrap and official sector sales) dropped 4.1% to 3,772 tonnes (121.3 million oz.). This third straight year of declining global mine production witnessed particularly steep drop-offs in Indonesia, South Africa and Australia. Producers’ margins were squeezed hard, too, as total cash costs rose 22% year-over-year to average US$470 per oz. in the first three quarters of 2008, in part due to record oil prices that have since subsided.

In a presentation in Toronto, Klapwijk said that the “financial implications of the worst economic slowdown since the Great Depression will be very favourable to gold.” He noted that the outlook for gold’s financial competitors — stocks, bonds, currencies, property — is poor for 2009, and that he’d recently seen “tremendous demand” for kilo bars and other physical gold products in Germany, Switzerland and Austria.

Klapwijk sees gold production rising slightly this year, but cautioned that “you could call it a bear market rally in gold production.”

One trend that stood out in 2008 was the 43% drop in official-sector gold sales to 279 tonnes (8.97 million oz.), mostly due to lower sales by Spain and other signatories of the Central Bank Gold Agreement, a trend GFMS expects to continue in 2009.

While the current, five-year CBGA is due to end in September of this year, Klapwijk expects the International Monetary Fund to signal that it will sell gold from its large gold reserves once it gets the OK from the U. S., possibly under a third CBGA.

On the demand side, jewelry demand plummeted 11% in 2008 to its lowest level since 1989, dragged down by rising gold prices and the slowing global economy.

Demand in the form of producer de-hedging sank 23% to 346 tonnes (11.1 million oz.), leaving GFMS to estimate the global hedgebook to be at a 20-year low of 498 tonnes (16 million oz.). Klapwijk added that last year was “probably the end of de-hedging as a major impact on demand” and that in 2009, “de-hedging is in its sunset year.”

• On Jan. 20, the Bank of Canada lowered its overnight rate target by half a percentage point to an all-time record low of 1%, noting that its outlook for the global economy had deteriorated since December, with the intensifying financial crisis spilling over into real economic activity. The overnight rate has been lowered 3.5% since December 2007.

The bank expects Canada’s economy, which is now in recession, to contract through mid-2009, with real gross domestic product dropping by 1.2% this year on an annual average basis. But the bank reckons that real GDP will ultimately rebound, growing by 3.8% next year as policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar.

Meanwhile, the bank expects total consumer-price-index inflation to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices, and says it remains committed to a 2% inflation-rate target over the medium term.

It’s all another good sign for the performance of gold prices in Canadian dollars this year.

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