The gold industry’s chief gatherer of supply-and-demand data, London-based
Speaking at a luncheon held in Toronto to promote the release of Gold Survey 2001 — Update 2, GFMS Managing Director Philip Klapwijk described a host of factors that kept gold prices pretty much parked in a US$260-to-$280-per-oz. trading range during 2001.
On the supply side, global mine production in 2001 was less than 1% higher than in the previous year, at 2,595 tonnes (83.4 million oz.), with the strongest rise being recorded in Indonesia, where
GFMS predicts global mine production will fall slightly in the first half of 2002, only to rise about 1% in the second half as new mines and expansions come on-stream.
Said Klapwijk: “We see the continuation of a trend that has been noticeable now for more than a decade, and that is mainly for declining production in what we call the ‘Big Four’ — South Africa, U.S., Australia and Canada.” He noted that losses from the Big Four are being offset by increased production from elsewhere in the world, particularly China, Russia and Indonesia.
“As for why production is not falling the way some market watchers have expected, with gold prices at 20-year lows, that is due to the fact that most producers are producing gold on a cash-positive basis,” said Klapwijk.
GFMS found that total cash costs in the industry for the first nine months of 2001 averaged US$178 per oz., down a significant 7% from the 2000 average. Klapwijk said this decline in costs was mainly the result of local currency weakness versus the U.S. dollar, particularly in South Africa.
Turning to gold sales by central banks, GFMS found that official-sector net sales remained virtually unchanged in 2001 at 468 tonnes (15 million oz.). Of this, the signatories to the 1999 Washington Agreement accounted for 420 tonnes.
In 2002, GFMS expects some 458 tonnes of gold to be sold by the official sector.
“This area is really dominated by the situation in Europe,” said Klapwijk, who noted that outside of Europe, few central banks were selling gold in 2001, in contrast to the situation during the late 1990s.
“When you look at the gross picture last year, the interesting thing that emerges is that there were countries that were interested in acquiring gold, and those purchases nearly offset the sales from other countries such as Brazil and Uruguay. If this continues to be the case, we can expect to see a fairly stable and uninteresting picture in the next few years on the central-bank side, which will bring some stability in expectations to the market.”
GFMS revealed that global sales of gold scrap shot up 14% in 2001 to 695 tonnes (22.3 million oz.), mainly due to high domestic prices and economic crises in several countries, particularly Turkey, Egypt and Indonesia.
“The important thing to note about scrap is that it has a tendency to come out during periods of price increases,” Klapwijk explained, “and that was certainly the case last year. He went on to point out that in September and October 2001, there were significant flows of scrap out of certain Asian and the Middle Eastern markets back into Europe.
In what Klapwijk called “the most significant development on the supply side,” there was, in 2001, a drying up of selling pressure from investors. Net dis-investment (excluding bar hoarding and coin fabrication) shrunk dramatically to a more neutral 46 tonnes (1.5 million oz.) from the heavy, Y2K-inspired 322 tonnes (10.4 million oz.) sold in 2000. The reduction is mostly due to a decrease in the volumes sold back rather than a countervailing rise in fresh investment.
Meanwhile, total world gold-fabrication demand last year fell by 7%, year over year, to 3,483 tonnes (112 million oz.), with the greatest absolute drop recorded by the jewelry sector and the steepest percentage drop in electronics, particularly in the U.S. and Japan.
World jewelry demand fell 6%, year over year, to 2,995 tonnes (96.3 million oz.) in 2001 — a drop Klapwijk blames on the slowing world economy, which translated into weaker gold-jewelry consumption in the U.S. He expects jewelry demand to suffer further losses in 2002.
“The big surprise in the numbers was the shift seen with respect to producer hedging,” said Klapwijk. GFMS has found that, for the second consecutive year, there was a net decline in outstanding positions of an estimated 101 tonnes (3.2 million oz.) from the end of 2000. This is in stark contrast to the situation during most of the 1990s, when producer hedging generated an average of 240 tonnes (7.7 million oz.) per year of supply.
Klapwijk said the reasons for this shift are the virtual absence of a contango, widespread producer currency weakness, and ongoing caution stemming from the September 1999 gold-hedging crisis.
In the first half of 2002, hedging is expected to continue falling by at least 26 tonnes (836,000 oz.), though Klapwijk added he does not anticipate a dramatic swing in the amount outstanding.
GFMS estimates that the final demand category, bar hoarding, will have risen in 2001 by a modest 3%, year over year, to 220 tonnes (7.1 million oz.), mainly as a result of gains in Japan, India and the Middle East.
Looking back on 2001, GFMS regards the resilient US$260-to-$280-per-oz. range as the year’s “most significant price feature” — not the short-lived price spikes in May and September.
The company believes the key to maintaining this range was fabrication’s increasing price elasticity and stronger scrap-price responses, which pulled breakouts back toward the price equilibrium.
“The post-September 11th rush to gold, which for a couple of days was really interesting, was short-lived and, in retrospect, occurred on a modest scale,” said Klapwijk. “There wasn’t really a clamouring for gold-bullion products.
“Another interesting trend last year was the lack of commitment on the part of funds, even in the wake of September 11th — it’s not as if people were piling into gold as the stock market crashed. Yes, at the margins, there was some investor interest, but gold simply wasn’t on the radar screens of the vast majority of fund managers.”
Still, he added that there was less inclination on the part of traders to short the market in 2001.
“It’s also quite interesting to note that the gold-price increases over the course of 2001 did, in fact, occur in the world’s three main currencies [U.S. dollar, yen and euro]. This is quite a departure from the events previously, and may be quite significant.”
Klapwijk said the GFMS is forecasting a 9% decline, year over year, in fabrication demand in the first half of 2002, primarily based on forecasts for growth in gross domestic product, which he said are pessimistic.
He said fashion may play a role in supporting gold demand, with the yellow metal regaining some popularity, and larger-size gold jewelry returning to prominence after several years of trendy minimalism.
“Local gold prices will also be a factor, as much as the U.S. dollar price. Here we’re not terribly optimistic, though a case can be made for a rise in gold based on a weaker U.S. dollar.”
GFMS expects average gold prices to increase from an average of US$276 per oz. in the last half of 2001 to US$282 in the first half of 2002, with higher investment and a cut in producer hedging outweighing a fall in fabrication demand.
The forecast range is US$270-$295 per oz., with GFMS maintaining that demand elasticity and scrap will be in a position to keep prices range-bound.
“If you do see a breakout from this range, we are somewhat more inclined to expect it on the upside rather than on the downside, particularly if investment proves stronger,” said Klapwijk.
He points
to several factors that could lead to higher gold prices going forward: renewed inflation; low interest and gold-lease rates; stock market weakness; a lower U.S. dollar; and security concerns.
“If you do believe, as we do, that we’re going to see a weak economy in 2002, that’s hardly the backdrop for a substantial rise in inflation. That makes it difficult for those who predict that inflation is going to come roaring back and push gold higher.”
Klapwijk described U.S. equities as being “still very much overvalued,” so that “we can expect earnings to continue to disappoint and stocks to come down somewhat . . . and that could be a positive for the gold price.
“As for a more positive investor sentiment [towards gold], we think it is unlikely. However it’s better than it has been in several years. If you look at the factors that affected gold prices several years ago, most of them were negative, whereas now, the majority are neutral to positive.”
Gold Survey 2002, including revised supply and demand figures, will be released in April. Some details are available now at www.gfms.co.uk
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