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Has gold run out of steam?
Brendan Ryan
Posted: Fri, 02 May 2008
[miningmx.com] -- AS the gold price swirls around at low US$900/oz levels, the debate rages over whether the metal has shot its bolt or is headed back above the $1,000/oz mark.
London-based precious metals research consultancy GFMS has a foot in both camps, judging by its latest authoritative annual review of the gold market.
Presenting its 2008 report, GFMS chairman Philip Klapwijk says the market conditions that drove gold above $1 000/oz are still present. "Continued investor interest will be the principal driver of the continued rally to a high above the $1,100 mark," Klapwijk says.
That renewed investor interest has been fired by the sub-prime credit crisis. Says Klapwijk: "Risk aversion has increased considerably, with no material signs of easing on the horizon despite intervention from the monetary authorities."
He adds that problematic financial
markets, plus economic slowdowns, point to further declines in equity prices. That's also favourable for gold as well as the price of various other commodities.
But GFMS doesn't expect the gold price to stay above $1,000, mainly due to the negative consequences of those high prices for the jewellery industry, the most important consumer of the metal.
Klapwijk says: "Imbalances in the market
suggest that sooner or later the gold price will have to fall. Nevertheless, this is most unlikely to occur in 2008 and, potentially, not until well into 2009."
He adds: "In the medium term, prices could move sideways or even retrace a little more; the mid-$800s are a possible low for the rest of the year, with prices below that likely to be bid up by bargain hunting and stock replenishment."
While Klapwijk and GFMS CEO Paul Walker believe that $1,100 is achievable, they maintain gold is unlikely to hit $1,200/oz. That $1,200 mark has a particular significance for Walker in terms of the bet he made in September 2007 at the Denver Gold Forum with then-Gold Fields CEO Ian Cockerill. Walker said he'd shave his head if gold reached $1,200/oz before year-end 2008.
GFMS statistics show gold production by the world's mining industry dipped a mere 10 tonnes - equivalent to 0.4% of the total - last year and the consultancy reckons mine production will level peg
this year.
That's where one of the differences between GFMS and other analysts - such as JP Morgan - becomes apparent, as JP Morgan is far more negative on the future gold production trend, which it believes will continue down.
Gold mine supply peaked at 2,645 tonnes in 2001 and dropped to around 2,447 tonnes last year, according to JPMorgan's numbers. JPMorgan's latest "Golden Goose" report (released early in April) states: "The mining majors now feel that achieving flat production is the 'new growth'. Flat production is now often achieved through acquiring others' properties, hence flat production for Barrick and Newmont doesn't imply flat production for the whole industry and we expect further production declines."
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