Gold could move higher

Economic and political instability could push gold to US$450 per oz. this year, according to a survey by London-based Gold Fields Mineral Services (GFMS).

Gold Survey 2004 (36th edition), an annual survey of the world gold market, says perhaps the greatest driver of investment over the next year or so will be economic developments in the U.S.

Explains GFMS Chairman Philip Klapwijk: “The U.S. fiscal and current account deficits, on top of eye-watering levels of consumer debt, create huge risks of another hefty slide in the dollar, plus eventual recession and a slump in equity markets. Throw in instability in Iraq and you’ve got pretty good conditions for a further surge in investment.”

Adds Klapwijk: “And don’t forget that the financial inflows into gold last year, which we estimate at a little more than US$10 billion, on a net basis, were still tiny compared to the potential sums available.”

GFMS says the inflow of investor money was the key driver of last year’s dramatic price rally. The report, however, still sees de-hedging by producers as having played an important role.

Last year de-hedging dropped by roughly one-third, but that still left it at over 300 tonnes — the second-highest amount ever.

Prices in the second quarter of 2003 were being attacked by investors bailing out as the bottom fell out of premiums built up before the Iraq war. Oddly, that’s when the market witnessed heavy de-hedging.

Furthermore, GFMS says de-hedging should rise in 2004 to somewhere between 340 and 400 tonnes. Fabrication is also expected to rise in 2004, following the 4% drop GFMS forecast in 2003. “Weak physical offtake acted as a major drag on prices for much of the year,” says Klapwijk. “But when we saw the price-sensitive markets get used to higher gold prices toward the end of the year, that certainly helped take the brakes off the rally.”

The consultancy sees the supply side as having played a lesser role in shaping prices last year. Both scrap and central bank sales grew by more than 10%, but these gains were largely in response to the rally. GFMS also does not expect a supply shock to undermining the anticipated rally. Scrap might slip, owing to price ennui, and official sector sales could also fall. The latter projection is based on a belief that sales under the new European Central Bank Agreement may fail to reach their annual limit, while purchases by others in 2004 are a possibility.

Some highlights from the report are as follows:

— Global mine production edged up three tonnes, compared with 2002 levels, to reach 2,593 tonnes, though this figure fell just short of the record 2,621 tonnes reported in 2001. On a regional basis, losses recorded in the U.S., Canada and South Africa were offset by growth in such countries as Peru, Australia and China.

— Weighted average cash costs rose a sharp US$42 per oz. or 23%, to US$222 per oz., owing to currency movements.

— Total fabrication fell 4% to 3,049 tonnes in 2003, largely because of the 6% drop in jewelry demand. Other industrial and decorative demand also saw a fall, of 2%, and dental off-take slipped a fraction. In contrast, electronics was up 14%, while coin fabrication rose by 9 tonnes.

— De-hedging fell 29% to 310 tonnes, though this was the second-highest level ever. The decline was largely a result of a positive price outlook, shareholder pressure and buy-backs of positions inherited through merger activity. Fresh project hedging, for example for Newcrest’s Telfer mine in Australia, partly offset the drop.

— Implied net investment rose a hefty 478 tonnes, chiefly through strong buying from hedge funds of over-the-counter paper products and on Comex.

— The preceding is from an information bulletin published by London-bases Gold Fields Mineral Services.