GFMS bullish on gold despite early stumble (January 24, 2005)

U.K.-based Gold Fields Minerals Services says that, despite a slow start, investors are expected to lead the charge to an average gold price of US$477 per oz. during the first half of 2005.

GFMS says that while the gold price should break through the 16-year high of US$454.20 per oz. achieved in early December 2004, it will not likely reach the 1988 high of US$483.90 per oz.

During a recent presentation in Toronto, GFMS’s mine production and hedging specialist Bruce Alway said any dips below US$420 per oz. during the first half of the year would be short-lived. He added that a shift in investor psychology means that such dips would likely be viewed as buying opportunities.

The case for sustained investment activity is based on GFMS’s forecast of continued dollar weakness, low interest rates, looming 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 362 tonnes, or US$5.2 billion, in the first six months of 2005.

Alway says there is even more upside when one considers that institutional investors have so far only “dabbled” in the market. He figures that a “small shift in the allocation of institutional funds” could trigger a significant rally.

In 2004, gold averaged US$409 per oz., up nearly 13% from the US$363.32 average in 2003.

A summary of findings reported by the GFMS follows:

— 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 partly a reflection of 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. Mine closures in Canada contributed to an 11-tonne drop in North American production.

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

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

— Global fabrication demand is estimated to have climbed by 4.6% to 3,179 tonnes, with every major area of gold offtake posting an increase. The jewelry and electronics sectors grew by 99 tonnes and 26 tonnes, respectively. 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 surpassed the record levels of 2002, totalling about 424 tonnes of provisional demand, with 70% of that being delivery into existing contracts; the balance is represented by buybacks. At the end of 2004, the global delta-adjusted hedge book contained 1,797 tonnes of gold, or about nine months’ worth of production.

— World investment demand was more than halved to 314 tonnes in 2004. GFMS says that figure must be viewed in light of the highly elevated levels of implied investment in 2003. In contrast, coin sales and bar-hoarding rose by 7% and 34%, respectively.

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