Gold rally will continue: GFMS

Gold Fields Mineral Services expects gold prices to continue rallying over the first half of the new year, perhaps surpassing US$450 per oz. before this period is out.

That was among the predictions offered by Bruce Alway, GFMS’s mine production and hedging specialist, as he presented a preliminary review of 2003 and a forecast for the first half of 2004 at a recent seminar in Toronto.

He noted, however, that the possibility of a correction prior to such a peak is not entirely being ruled out, though such a correction would likely be brief and limited in scale.

Alway alluded to the market’s growing dependence, over the coming months, on investment in order to sustain prices, and added: “We may well see a pick up in producer de-hedging, . . . but it looks highly unlikely we’ll return to the bumper levels seen early last year, let alone the record volumes seen in the second half of 2002.

“This has nothing to do with hedging coming back into fashion. The majors seem as hostile to this as ever. It’s merely a function of many of them having already restructured their books and higher prices.”

At the same seminar, Philip Klapwijk, GFMS’s managing director, noted that 2003 “saw a lot of hot money flow into gold, mainly as speculators saw some good opportunities with a war in Iraq and a dollar heading south. But what may be more interesting this year is whether gold can generate stronger interest from longer-term players with larger sums to invest. Alternative investments certainly remain in vogue, and we think gold will pick up from these portfolio diversification moves.”

Alway said he saw little support for prices from jewelry fabrication demand. Not only was it estimated to have fallen in 2003 but it is forecast to drop by close to 10% in the first half of 2004. “The jewelry sector had a pretty grim 2003, thanks to higher prices, the Iraq war, SARS, and so on,” noted Alway. “Some of those [obstacles] may now be behind us, but high prices aren’t. That looks like it’s going to hit the price-sensitive Asian markets.”

The remaining components of gold’s supply and demand fundamentals played a lesser role in last year’s rally, though the modest rise in official-sector sales and larger increase in scrap restrained the price move. However, for the first half of 2004, the contribution from these two was viewed as more positive, with central bank sales forecast to fall and scrap not expected to rise.

Supply-demand highlights include:

— Mine production in 2003 is estimated to have risen a fraction, year over year, to just over 2,600 tonnes as gains in Australia, Peru, China and elsewhere outweighed losses, principally in South Africa, the U.S. and Canada.

— Cash costs in the third quarter of 2003 exceeded US$220 per oz. — a level more than US$40 higher than in the same period in 2002. Currency appreciation, in particular for South Africa, accounted for much of the rise.

— Net official-sector sales in 2003 rose by more than 5% to just over 590 tonnes — their highest level since 1992. Much of the rise came from non-Central Bank Gold Agreement countries. Sales in the first half of 2004 are expected to drop back by more than 60 tonnes, year over year.

— Total fabrication is estimated to have dropped by almost 5% in 2003 to only just over 3,000 tonnes as the 7% slump in the jewelry sector more than outweighed gains elsewhere, such as in electronics.

— Lower jewelry demand was chiefly due to losses in Italy and Eastern Asia, and, to a lesser extent, the Middle East and U.S. The fall was largely attributable to higher prices, SARS and the Iraq war.

— Producer de-hedging is thought to have slowed sharply in 2003 to slightly more than 300 tonnes. The drop was most evident in the second half, largely as a result of rising prices, which made buybacks more expensive. De-hedging in the first half of 2004, at more than 100 tonnes, is expected to be greater than in the second half of 2003, but still well under last year’s first half.

— World investment almost doubled, year over year, to 875 tonnes in 2003. This was solely due to the hefty increase in implied net investment to more than 650 tonnes, stemming chiefly from growth in institutional investment in response to political tensions (such as the Iraq war) and, especially, economic uncertainties (such as dollar instability). In contrast, coin sales and (non-Western) bar-hoarding fell by 4% and a 38% respectively.

— The source of the above information is Gold Survey 2003: Update 2, published by London-based Gold Fields Minerals Services.