METALS COMMENTARY — Demand for gold offsets hedging activity

Gold 1996, the latest annual survey of the gold market from Gold Fields Minerals Services, shows that the hedging of future mine production reached a record level in 1995. Even so, the report shows that this increased supply was more than offset by growth in physical demand, which also rose to a record level.

Overall, 1995 was not an exciting year in the gold market, as price volatility fell to the lowest level since 1968. On the other hand, Gold Fields notes that the statistical position was anything but static, with strong undercurrents at work leading to major changes in supply-demand components.

On the supply side, world mine production fell 0.4% last year to 2,272 tonnes, with the drop largely attributed to a 10% decline in South African production. Production from the former Soviet Union declined by more than 6%, enabling Canada to surpass Russia and become the fourth- largest (no longer fifth-largest) producer in the world.

Gold production grew in other parts of the world, namely Latin America, Asia and Africa. Among the top 10 producers, the most significant movement was Indonesia’s rise to seventh place, overtaking Brazil, Uzbekistan and Papua New Guinea. Indonesia was 19th on the list as recently as 1989. Papua New Guinea, meanwhile, appears to be in danger of losing its place in the top 10 to rising stars Ghana, Peru and Chile.

The most dramatic development on the supply side in 1995 was the 183% increase in the forward selling of future output. Higher levels were recorded for North America and Australia, where hedging instruments are commonly used.

The overall increase in forward selling positions resulted in a net 461 tonnes of accelerated supply being added to the market (compared with 163 tonnes in 1994).

Official sector sales also rose last year, to 201 tonnes — more than double the 1994 level. A large portion of this total was attributed to the Belgian Central Bank, which sold 175 tonnes in 1995.

The survey showed, however, that the 7.8% increase in total supply was absorbed by higher offtake in all demand categories. Jewelry fabrication and bar hoarding were particularly strong, with fabrication rising 6% to 2,749 tonnes. Strong demand in India resulted from economic reforms and another good harvest. Demand improved in the Middle East, and some limited growth was noted in Europe, North America and the Far East. Chinese demand weakened as austerity measures for controlling inflation were introduced in the country.

The publication hinted that gold prices might have broken through and remained above the US$400-per-oz. barrier early this year had not that rally coincided with a period of seasonally weak demand. The gold market also had to contend with the renewed sales of gold by the Belgian central bank during this period.

Stewart Murray of Gold Fields Mineral Services points out that the current level of mine production and scrap is still insufficient to meet the demands for fabrication and bar hoarding.

“Last year, the gap of 682 tonnes was filled by increased producer hedging and, to a lesser extent, by higher official sector sales,” he says. “The questions this year are, firstly, whether a similar level of hedging will be seen again and, secondly, whether there will be any further official sector sales. If this does not prove to be the case, where will the market find the additional supplies required to fill the supply-demand gap?”