David Brown, CEO, Impala Platinum
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Who buffed the precious metals?
Allan Seccombe
Posted: Thu, 28 Dec 2006

[miningmx.com] -- GOLD'S traditional link with the dollar was tested in 2006 and shot up to its highest level in 26 years as the oil price explored record highs, tensions flared in the Middle East and doubts waxed and waned about the health of the American economy.

It was a remarkably volatile year for gold and platinum prices, but for very different reasons. Silver hung on the coat tails of its more popular gold sister and both metals felt the effects of increased investor interest in the form of exchange-traded funds backed by physical metal.

A rumour swept the market in the closing stages of the year that an ETF for platinum would come to the market. Barclays said it has considered implementing a platinum ETF but had no plans of doing so.

The gold price proved nearly impossible to forecast with any accuracy. Some predicted gold would be trading above $700 an ounce by the end of the year; others saw it higher yet. The more cautious in the market thought it might pull back to around $550.
linkage to the dollar broke down quite badly
“The interesting thing about gold this year is that its linkage to the dollar broke down quite badly this year and it’s quite difficult to see what is the key driver of the gold price now,” said John Clemmow from UBS.

“Clearly there is still the influence of the dollar but it looks a though, certainly during the huge price spike we saw earlier this year, it was more fairly frantic investment buying and as this wave has moved through the market, it’s not clear how that’s going to play out,” he said.

From the end of March, gold took a breath-catching ride up to $730 on 12 May, prompting a rash of forecasts from gold bulls that the price was going to test its all time 1980 high of $850 and then power all the way up to the $1,000 mark. Some ardent gold bulls have even called for a gold price of $3,000 in coming years.

By the middle of December gold was holding comfortably in the $620-$630 range.

The gold price is up around 22% since the start of the year and an astonishing 47% over the past two years.

“The market fundamentals are very strong. They are as strong as I’ve ever seen them in the 30 years I’ve had an association with this business,” AngloGold Ashanti CEO Bobby Godsell said in July.

The dollar’s status as a reserve currency is under threat say some market watchers, and they believe gold could be a partial replacement as a store of wealth by reserve banks and individuals, which bodes well for the gold price in the future.

The dollar has fallen nearly 14% against the euro this year and, on a trade-weighted basis, it has shed six percent of its value.

The political turmoil in the Middle East this past year has been a driver of both the gold and oil prices. There was a tense standoff between Iran and the West over the Middle Eastern nation’s nuclear programme, which is seen by the US and its allies as a weapons programme, something the Iranians deny.

Israel invaded Lebanon and the violence in Iraq intensified during 2006. In Nigeria, militants disrupted oil supplies. The combined effect was to drive crude oil prices to unseen highs of $78 a barrel.

The World Gold Council said during the year there was a step change in the supply and demand fundamentals for gold.
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Pension funds, for example, which have shown no interest in holding gold a few years ago are now including it in their portfolios. Production has not increased because relatively little has been spent exploring for new gold deposits.

A total of 559.6 tons of gold worth $11.3bn are accounted for by ETFs traded at six bourses around the world.

This is well above the 500 tons of gold that central banks were entitled to sell in the year to 26 September 2006. In fact, the central banks sold just 395.75 tons in 2006, sending a signal to the market that central bank gold sales could be starting to wind down.

That means there was some 164 tons of new demand in the market.

The year also saw high levels of scrap coming onto the market, lured by the high prices. There is a base load of scrap gold of about 600 tons a year from the jewellery processing and electronic sectors. In 2006, scrap metal supplies fed an estimated 1,015 tons of gold onto the market, according to Virtual Metals.

On 21 November, platinum recorded its single-largest price gain in about 20 years when it leapt to $1,400/oz on speculation of the introduction of an ETF. The price was a fresh record. The previous high was $1,340/oz set in May.

The fundamentals of the metal, which has been in a deficit position for some seven years, are seen as unsupportive of an ETF. Unlike gold, platinum is not a traditional store of wealth. Platinum is used predominantly in making catalysts in motor vehicle exhausts and in jewellery.

The gold market is 17 times bigger than the platinum market.

The platinum price has gained 15% in the year and 30% over the past two years.

“Quite clearly we do see a longer-term platinum price of somewhere between $900 and $1,100 an ounce, and certainly $1,100 per ounce is more reflective of the underlying fundamentals of demand and supply in the market,” David Brown, CEO of Impala Platinum, said in December.

Johnson Matthey said the supply deficit in platinum had narrowed to about 20,000 oz in 2006 from 40,000 oz the year before.

The higher prices for platinum this year has seen Chinese jewellers switching to the cheaper sister metal palladium, which is currently about $330/oz.