Testing the ‘safe haven’ theory

Unless an all-out investor-led recovery in gold as a “safe haven” develops, prices will likely remain subdued as a slowdown in the world economy undermines demand for items made with the yellow metal.

According to Gold Survey 2001 — Update 1, published by London-based Gold Fields Mineral Services (GFMS), any such forecast must come with a huge caveat as the full impact of the terrorist attacks in the U.S. has yet to be made clear.

“There’s an obvious upside for the price should an investment-led recovery gather pace,” says Philip Klapwijk, managing director of GFMS, “but only if gold can fulfil and sustain its traditional safe-haven role.” There is growing concern that, should it fail to do so, broader dissatisfaction with gold as an investment medium could set in, undermining longer-term price support.

Moreover, if recent events prick the bubble of consumer confidence in the U.S., that country’s economy could experience a more pronounced and lengthy downturn. This is seen as further weakening fabrication demand both at home and abroad as faltering imports transmit the U.S. slowdown to other, export-led economies. A combination of such possibilities leads GFMS to forecast that the full-year price average could still dip below US$270 per oz. (The gold price averaged US$265.62 per oz. for the first half of 2001.)

As for the fundamentals of supply and demand, GFMS forecasts that full-year fabrication demand will fall by almost 4% to 3,612 tonnes, whereas world investment (including bar hoarding and coins) will increase by as much as 156 tonnes.

First-half estimates show a 3% decline in total fabrication demand versus a 4% rise in mine output. The fact that this perhaps slightly surprising set of statistics did not lead to a more pronounced fall in prices over the first half was the result of two key factors: first, the rise in mine output was largely due to a weak first half in 2000 (the forecast full-year gain of 1% is a more representative figure); and second, many of the more volatile components to supply supported the gold price. Producer-hedging, for example, remained subdued and actually contributed a modest amount to demand. Similarly, first-half official sector sales were estimated to have fallen roughly one third year-on-year. It must be noted, however, that this decline was largely a matter of timing as their full-year forecast is for net sales of 487 tonnes, a rise of 3% on 2000. GFMS believes that this relative stability and greater predictability mean that these sales are no longer seen as a “swing factor.”

On the supply side, global mine production increased 4%, year over year, in the first half to 1,274 tonnes. Indonesia was responsible for much of the gain, having produced an additional 39 tonnes as output at the world’s largest gold producing mine, Grasberg, recovered.

Total cash costs fell US$16 per oz., year over year, partly because of further currency weakness in gold-producing countries. Producer hedging contributed an estimated 41 tonnes to first-half demand. Most producers were content to deliver into existing contracts or allow them to expire without replacement while others were actively closing out positions. This came about, in part, through continued general caution toward hedging. Conditions for hedging were also often unfavourable, with prices weak and lease rates high and volatile.

Net official-sector sales reached 255 tonnes in the first half. Countries in the Central Bank Gold Agreement once again provided the bulk of these sales (201 tonnes). Second-half sales are forecast a little lower than in the first.

Scrap volumes rose 12% in the first half to an estimated 334 tonnes, reflecting economic and currency problems, which often led to high local gold prices, in both the Middle East and East Asia.

Disinvestment (excluding bar hoarding and coin fabrication) remained a market feature of the first half but was much reduced in scale, falling almost 40% to 56 tonnes. Once again, this mostly consisted of private investor sales in Europe.

Meanwhile, on the down side, total world fabrication fell 3%, year over year, in first half 2001 to 1,783 tonnes. The largest decline was recorded in jewelry (35 tonnes).

Industrial sector usage, however, fell far more proportionately, slumping more than 8%. Electronics demand, which is concentrated in East Asia, dropped by 27 tonnes. Total demand in the second half is forecast to slip 4%, year over year, as India’s gains in the first half are not expected to be repeated and Europe’s losses could accelerate.

World jewelry demand slipped to 1,523 tonnes in the first half, down 2%, year over year. Much of this came about through a worsening financial or economic climate in many regions, with especially sharp losses recorded in Turkey, Italy and the U.S.

Bar hoarding rose by more than 10%, year over year, to 95 tonnes in the first half as gains in India and the Middle East outweighed losses across much of Southeast Asia and the Asian Pacific.