Bobby Godsell
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Investors steer gold price. For now
Allan Seccombe
Posted: Wed, 15 Mar 2006

[miningmx.com] -- INVESTOR and speculator demand will continue driving the high gold price instead of supply and demand fundamentals, but physical demand must be healthy to provide support to the market when this interest tapers off, said AngloGold Ashanti.

The company will increase unhedged production so it can benefit from higher prices, it said in its 2005 annual report.

Increased investor and speculator activity last year drove the gold price to levels not seen in more than two decades, culminating in gold touching a 25-year high of $567/oz in January this year.

Gold was bid at $551.35 an ounce in London around midday.

“With investment demand still positive for gold, the final balance of supply and demand in the gold market will remain of secondary importance,” AngloGold Ashanti said.

“Investor and speculation purchases on the margin will continue to be the price-determining force in the gold market,” it said.

The higher oil prices have played a large role in driving investment flows into the metal because rising fuel costs have created a sense of uncertainty about the global economic growth, it said.
Investors, speculation will continue to be the price-determining force
“However, in the longer term it is important that physical demand is healthy given the ability of the physical market to provide offtake and floor price support at times when investor or speculator interest weakens.”

The gold market was in an over-supply situation in the second half of 2005 as official sales of gold increased by more than 40%.

Despite a drop in gold demand during the last three months of 2005, overall consumption of gold in jewellery picked up by five percent for the year.

The industry faces a challenge of stimulating demand for gold jewellery, which is increasingly competing against other luxury goods for consumer’s cash.

“The challenge for marketing gold is significant,” AngloGold Ashanti said.

“This is especially so given that demand for gold jewellery in many developed markets has declined materially in the past five years, with gold jewellery sales losing ground to other luxury consumer goods in developed markets,” it said.

An area of particular focus is India and China where attention is being given to modernise gold jewellery retailers and spiking consumer interest by creating a “modern product offer” to lure purchases for non-traditional reasons, it added.

AngloGold has 35% of five year’s worth of production hedged, but these positions are underwater.

At the end of 2005, AngloGold Ashanti had a net delta hedge position of 10.84 million ounces with a negative marked-to-market value of $1.94bn, the company said in its 2005 annual report. The position was valued at the prevailing spot price on 31 December 2005 of $517/oz.

AngloGold Ashanti’s hedge book of 337 tonnes shadows South Africa’s total 2005 output of 296 tonnes.
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The hedge position grew to a negative marked-to-market $2.4bn by 9 February when the gold price was $557/oz.

“AngloGold Ashanti continues to take a positive view of the gold price and, consequently, will continue to deliver into maturing forward sales contracts and to increase the proportion of our production which is exposed to the higher price,” chairman Russell Edey and CEO Bobby Godsell said in a letter to shareholders.

AngloGold Ashanti’s 2006 gold output will fall to between 5.9 million ounces and 6.1 million ounces this year before bouncing back to 6.3-6.5 million ounces in 2007 as increased production comes from Moab Khotsong in South Africa, Australia’s Sunrise Dam mine and its Brazilian operation.