Editorial: Gold cruises past US$600

The generational bull market for metals slipped into high gear in mid-April, with prices surging higher for gold, silver, platinum, copper, nickel and zinc.

The commodity grabbing the biggest headlines around the world, though, was oil. It hit an all-time, nominal high on Easter Monday, with light sweet crude for May delivery settling at US$70.40 per barrel on the New York Mercantile Exchange, up more than a dollar from the Thursday close and US59 above the previous closing record, set last August during the aftermath of Hurricane Katrina.

Adjusted for inflation, oil prices will still have to rise above US$90 per barrel to exceed the all-time highs set a quarter century ago when supplies became tight at the onset of the Iranian Revolution and the country’s war with Iraq. In today’s dollars, the average price of crude in 1980 was about US$77 per barrel.

While the significance of the gold-to-oil price ratio is still hotly debated among gold investors, there’s no doubt that gold has been gaining momentum of late. It has swiftly hurdled over another big, round number — US$600 per oz. — and is trading at US$621 as we go to press.

There are all the usual reasons for gold prices to be buoyant: rising geopolitical tensions, particularly the showdown between the West and Iran over the latter’s alleged covert nuclear-weapons program; continued financial deterioration in the U.S. and the related debasement of the greenback; and the mine supply of gold being far outstripped by strong physical demand from the Middle East, China, India and parts of the West.

As well, Western central banks have less gold to sell to depress the price, so we’re now seeing stronger advances in gold prices, with intra-day moves of US$15 no longer uncommon.

Gold’s poor cousin, silver, has moved along nicely with gold and actually outperformed it lately, shooting up from under US$9 a few months ago to US$14 per oz. at presstime.

Another testament to gold and silver’s strength is that we haven’t endured any significant price corrections so far this year, defying the predictions of many nervous-nellie investors.

The past week also saw the gold market welcome new data from gold consultants GFMS, who just released their Gold Survey 2006.

Perhaps the biggest shocker in GFMS’s latest study is the consultancy’s own uncharacteristic bullishness on gold prices. The London-based group that for so many years sneered at North American gold bugs as if they were unsophisticated rubes, now has its chairman, Philip Klapwijk, stating that “levels safely over US$600 are now in our sights and further hefty gains over the next year or two are quite possible — in the right circumstances, the 1980 high of US$850 could even be taken out.”

GFMS believes this kind of bull run would be driven by investment demand and supported by the huge U.S. budget and trade deficits. The consultancy says there is a “high probability of a sharp slowdown in U.S. economic growth and a slide in the U.S. dollar.”

Of particular interest to miners, GFMS calculated that global gold mine production rose 2% to just over 2,500 tonnes (80.4 million oz.) in 2005, thanks mostly to new projects in Latin America, China and Mali, as well as improved performance from Indonesia’s Grasberg mine, which suffered two landslides in 2003. Owing to the closure of high-cost mines, South Africa’s gold production dropped 46 tonnes, to its lowest levels since 1923.

Looking at the big picture, though, mine supply is very much constrained: annual gold mine production has pretty much levelled off around 2,500 tonnes since 1998, and the overall quality of the deposits slated for new production seems to be declining.

Rising costs are a problem, too: GFMS reports that the weighted average cash costs of mine production rose 7% to US$269 per oz., owing to currency effects and higher prices for labour, fuel, tires, cyanide and other consumables.

Canada and the U.S. posted the greatest rises in cash costs, with annual hikes of 19% and 11%, respectively, though South Africa and Australia remain the world’s highest-cost major producers of gold.

For 2006, GFMS expects mine production to jump 4% as more new mines come on-stream and ramp up to full capacity. At the same time, the supply of gold from scrap is expected rise.

All in all, the supply and demand balance points to gold continuing its march higher for years to come.