Jessica Cross, CEO of Virtual Metals
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Surplus gold will crimp price, says Cross
Allan Seccombe
Posted: Mon, 30 Oct 2006

[miningmx.com] -- The gold market will move into a large surplus of 219 tonnes next year as demand tumbles, something which could pull the gold price lower, Jessica Cross, CEO of Virtual Metals, said on Monday.

Gold demand is forecast in Virtual Metals’ The Yellow Book to drop by 313 tonnes in 2007, raising the market surplus to 219 tonnes from this year’s revised estimate of 64 tonnes.

Among the largest decliners in 2007 are the gold-backed exchange-traded funds (ETFs), where demand is seen more than halving to 101 tonnes in 2007 as the feverish excitement that made gold a red-hot investment this year subsides.

Gold rocketed to its highest level in 26 years, hitting $730/oz in May. It is currently trading at $603 after testing the mid-$500s.
you’ve got a bloody good price
“Our house view at Virtual Metals is that $600 will be quite well protected for the next six months and then possibly some downward pressure to $575, $550,” Cross told Miningmx in an interview. “Even then you’ve got a bloody good price compared to where we were 10 years ago. That’s still a robust price.”

“In 2006, because of such volatility and the price running up like it did, the whole supply demand balance was disrupted. If the price cools and there is less volatility demand and supply will adjust to something considered more normal,” she said.

The size of the surplus means the gold price will have to fall to ensure surplus metal is mopped up or jewellery offtake will tick up, taking more gold off the market. Scrap supplies could also fall, bringing some balance to the market, she added.

Mine supply is seen remaining fairly steady in 2007, but scrap recycling is forecast to fall by 117 tonnes to 897 tonnes as gold prices moderate.

Sales under the second year of the Central Bank Gold Agreement are believed by Virtual Metals to have hit the 500 tonne limit in the year to 26 September, but sales will fall short of that level in 2007, Cross said.

The reason for that is based on Germany stating that it might not come to the market to unload its full quota of gold under the five-year agreement.

On the demand side, jewellery consumption is seen rising on the back of a recovery in Middle Eastern buying of investment jewellery with money generated from high oil prices.

Central bank purchases are expected to fall to zero from 100 tonnes in 2006. De-hedging will fall 186 tonnes to 300 tonnes next year because of Barrick largely completing its de-hedging programme and there is less for big companies to restructure their hedge positions.

Cross was quick to point out how extremely difficult – if not impossible -- it is to forecast supply, demand and prices.
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Virtual Metals was caught by surprise by the levels of scrap that poured onto the market during 2006 because of the high and volatile prices during the year as well as the enormous de-hedging of 486 tonnes led by Barrick Gold, Cross said.

The London-based metals consultancy estimated in March there would be a 422 tonne surplus in 2006, revising this down to 64 tonnes in its October forecast as new data came in.

There is a base load of scrap gold of about 600 tonnes a year from the jewellery processing and electronic sectors. In 2006, scrap metal supplies fed an estimated 1,015 tonnes of gold onto the market, up from Virtual Metal’s forecast in March of 998 tonnes.

“This is a very dynamic market and things happen that you can’t anticipate. We are human and we do the best with the statistics we have at the time and we are happy to adjust our numbers as we are enlightened,” Cross said.