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WGC bullish on gold, but questions linger
Allan Seccombe
Posted: Wed, 16 Aug 2006

[miningmx.com] -- Fundamentals for the gold market for the remainder of the year are strong, but gold jewellery sales will depend heavily on price after volumes in that sector fell sharply in the first half of the year, the World Gold Council said on Wednesday.

“Looking toward the remainder of 2006, the political and economic climate remains favourable to gold investment, the fundamentals of the market are perceived as strong and the diversification benefits of gold are being increasingly recognised,” the WGC said in a quarterly review of supply and demand data.

Virtual Metals also put out data on supply and demand, which showed a market in deficit as opposed to the surplus figures seen by WGC.

For the remainder of the year, the fundamentals were looking a little weaker, said Virtual Metals analyst Matthew Turner, because the support from de-hedging would decline because the Barrick Gold programme to cut its hedge book had come to an end and central bank gold sales could increase.
the supply/demand balance will get slightly worse
“For a supply/ demand balance it will get slightly worse. The question is whether investment demand can fill that gap,” he said.

The Central Bank Gold Agreement that restricts central bank gold sales to 500 tonnes this year expires on 26 September this year.

De-hedging added a net 159 tonnes to demand in the June quarter. Central bank sales were a net 85 tonnes, down from the first quarter’s 107 tonnes and well below the 120-140 tonnes per quarter seen in recent years, Virtual Metals said.

Barrick reduced its hedge book by three million oz and AngloGold Ashanti by one million ounces in the June quarter.

Other players in the industry also trimmed their hedged positions, bringing the total reduction in the global hedge position down by 5.1m oz to 43m oz, 10m oz lower than it was at the start of the year, according to the Mitsui gold hedging report for the second quarter.

The World Gold Council, the gold industry’s marketing organisation, reckons the market was in a 52 tonne surplus in the second quarter of 2006. It’s analysis and comments on the market were based on data sourced from GFMS, a London-based precious metals consultancy.

Virtual Metals, which has a team of analysts providing proprietary research to mining companies, said the market was in a slim deficit of 10 tonnes in the June quarter.

Turner argued there was very little difference in the two sets of data, saying the WGC had used a higher scrap figure, which was very difficult to ascertain, and Virtual Metals had split a European central bank gold sale of 57 tonnes equally over the first and second quarter.

“It’s pretty marginal. The market is pretty balanced is the conclusion you can draw from those figures,” he said.

Both agreed that gold jewellery demand has fallen sharply because of higher prices. Those prices and the volatility in gold prices have resulted in increased scrap supplies gushing into the market.

“Prospects for gold jewellery demand will depend very heavily on future price volatility,” WGC said. “A period of price stability should see a recovery in the volume of demand and further growth in value.”

Consumers are seen by the WGC as returning to the market once the price volatility this year stabilises, it said.
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Gold jewellery demand fell 24% in the June quarter to 562 tonnes compared to the same period last year. However, in value terms, gold jewellery demand rose 12% to $11.4bn.

The biggest fall came from India where there was a 43% drop, followed by Saudi Arabia with 32%. China recorded a slim decline of two percent.

Scrap supply was 310 tonnes in the quarter, a 57% year-on-year increase, the WGC said. Virtual Metals put scrap supplies at 255 tonnes.

The amount of gold going into gold-backed exchange-traded funds (ETFs) fell sharply quarter on quarter to 39.1 tonnes from 108.7 tonnes, according to the WGC. Virtual Metals had similar data.

In the first quarter of the year investment demand for ETFs was strong as the gold price took to its heels as it raced towards a 26-year high in mid-May of $730/oz. The price then tumbled to $560 in short order.

“There was a slight outflow from ETFs in May. That bought the total quarterly inflow down,” Turner said.