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Gold surplus seen for 2006
Allan Seccombe
Posted: Mon, 03 Apr 2006

[miningmx.com] -- The gold market could swing to a 422 tonnes surplus this year if the gold price stays around the present level at which larger amounts of scrap are being recycled and jewellery demand is forecast to drop 20%, according to Virtual Metals’ Yellow Book.

The report said hopes of China being the next big thing in driving the gold price appeared to be misplaced, and retail demand there was unlikely to be stellar any time soon.

The gold market could record a surplus of 422 tonnes this year, the biggest in at least seven years, the second issue of the bi-annual Yellow Book showed. Overall jewellery demand could taper off to 2,341 tonnes from 2,954 tonnes last year.

The amount of scrap gold to be recycled is seen rising 19% to 998 tonnes versus 2005.

“There is no doubt that the price activity of the past six months has disrupted the physical markets,” said Virtual Metals CEO Jessica Cross. “We have yet to see at what trading range a market equilibrium will be re-established.”

Cross cautioned this outlook was based on the price performance of the first quarter of 2006 and any cooling down of the price later in the year could temper the forecasts.
Price activity of the past six months has disrupted the physical markets
If the price falls from its current level of $586/oz – the highest it has been in 25 years – to $520-$540, physical buying is expected to kick in and scrap flows will ease, said the report sponsored by Fortis Bank.

However, there is the chance that gold buyers could begin accepting the higher prices if they remain around these levels for a long time, Cross said.

The most difficult part of the gold market to forecast is the investment flow through hedge and pension funds into gold, which is currently dictating the upward direction of the market.

“What, if anything, will trigger a decision on their part to reassess the allocation of their portfolios and what that might mean for the gold price?” Cross said.

Demand for gold jewellery as an investment, particularly in India and the Middle East, is seen as the hardest hit of the offtake sector, accounting for 1,058 tonnes this year, down 30% from last year.

North American and European jewellery demand is seen down 12% this year to 1,283 tonnes.

Gold production this year is estimated at 3,973, up 53 tonnes from last year. New supply from projects kicking in because of the running gold price is unlikely to be seen for another three years, Cross said.

Hopes of increased demand from China, both at a retail and a government level to diversify foreign exchange reserves as a bullish factor driving the gold price would appear to be incorrect, analyst Gary Mead said in the report.

“These hopes are vain not because of any sinister reason, but because the world is a much bigger, more complex, and less linear than these positions assume,” Mead said.
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Chinese gold demand growth was up 3.5% last year at 274 tonnes, he said, adding the sector was hardly likely to shoot the lights out in future.

“Certainly China’s citizens will buy more gold in the years to come – but they will also be under pressure to spend just as much (if not increasingly more) of their hard-won and not vastly growing incomes on essential items such as homes, education and rising domestic expenses,” he said.