Gold prices remain stuck in low gear

Delegates attending a Toronto gold seminar organized by Gold Fields Mineral Services (GFMS) were told that prices are not likely to break the US$300-per-oz. barrier during the remainder of this year.

Philip Klapwijk, managing director of GFMS, predicted that, in the absence of new supply-side shocks from much higher producer hedging, central bank or fund selling, or a major correction in the value of the U.S. dollar, an expected recovery in fabrication demand should keep the price mostly in a US$265-$285-per-oz. range for the rest of 2000. Barring the unexpected, an average of US$276 per oz. is forecast for the second half.

“The key factor in keeping prices down is official sales,” Klapwijk said. He pointed out that sales in the first half of 2000 totalled 324 tonnes, more than 10 times higher than a year earlier. Signatories to the European Agreement (a 1999 deal signed by 15 European central banks to limit sales and lending) accounted for nearly 70% of this year’s official sector sales.

Other factors were disinvestment of coins and bullion bars purchased by private investors in 1999 as a hedge against a potential Y2K crisis. Total disinvestment in this category was 119 tonnes in the first half.

Total world fabrication fell 3% year-on-year, but coin fabrication saw a 70% collapse, owing to dramatically reduced demand caused by disinvestment of Y2K coins. Bar-hoarding fell over 26% year-on-year, affected by lower demand in India and East Asia.

Klapwijk noted that the physical size of the global hedge book was 3,139 tonnes at the end of June, down from 3,223 tonnes at the end of 1999. “It’s the first time net hedging has been on the demand side since 1994,” he added.

Despite the weak prices, global production declined by only 0.5% in the first half to 1,229 tonnes. Also, cash costs continued to fall, averaging US$193 per oz. in the first half, down 2% below 1999’s average.

Greg Barns, chief executive officer of the Australian Gold Council, urged producing companies to take more of an interest in what happens to gold after it is produced. Taking a page or two from De Beers’ marketing of diamonds might be worthwhile, he suggested. “There is no doubt we need to market our product, but any campaign needs to be sustained and well-researched.”

Barns also urged companies to follow Australia’s example and adopt standards for hedging disclosure. “The need for transparency is important and will stand us in good stead with investors.”

Bernard Swanepoel, chief executive of Harmony Gold (a South African producer) told delegates that in the current low-price environment “there is a great, great need for additional consolidation. The gold industry is fragmented and has too many producers.”

Swanepoel expressed disappointment that the South African government did not approve what he described as “a common-sense merger” between Gold Fields of South Africa and Toronto-based Franco-Nevada Mining. “I don’t have to defend my government’s refusal to approve [the merger] and I won’t.”

He pointed out that gold companies have only a few ways to grow. “Exploration is one, but most South African companies don’t do much exploration. Another is organic growth, but we don’t have a pipeline of projects in the country.”

Harmony has opted to grow through acquisitions and has made 14 deals in recent years, including one or two described as “screw-ups lost in the mix.”

Harmony’s purchase of the Bissett gold mine in Manitoba comes out on the positive side of the chart. “It’s going well,” Swanepoel explained. “We’ve built a new mine at the bottom of an old one, and we’re achieving our production numbers, albeit later than expected.”

Monica Weber-Fahr, senior economist for the World Bank’s Mining Department, stressed the importance of gold to developing nations. “It’s an emerging market business, accounting, in some cases, for 68% of investment in the economy of developing nations.”

Even so, Weber-Fahr said country risk is getting out of control. “Risk capital for mining is declining and, even at the World Bank, we’re investing more in cleaning up old mines than investing in new ones.”

Because mining investment now comes almost solely from the private sector, Weber-Fahr told delegates that companies must adapt to the social challenges involved in working in developing nations. “Community activism is on the rise,” she said. “Players must be open to public scrutiny by a growing civil society [non-government organizations].”

John Carrington, vice-chairman of Barrick Gold, also called for high social and environmental standards in his remarks opening the seminar. However, he urged governments to do more to help the mining industry meet these challenges. He called for “a common-sense approach” to the mine approval process, which is now burdened with red tape and bureaucratic delays. He also called for reduced non-tariff trade barriers and a more favourable corporate tax rate.

At the end of the day, delegates were given only a few rays of hope that better days might be ahead for gold. GFMS believes that a major retrenchment in the U.S. dollar — now viewed as some as the de facto currency of the world and a substitute for gold as a storehouse of value — probably offers the best chance for the price to move higher than is currently expected.

“With the U.S. dollar now overvalued against currencies such as the Euro,” Klapwijk stated, “this scenario cannot be ruled out, although we would not expect a correction in the value of the U.S. dollar to be matched by an equal percentage rise in the dollar gold price.”