Commodities | Sep 15 2006
By Greg Peel
Gold Fields Mineral Services publishes its survey each year – the most comprehensive statistical wrap of global developments in gold. Yesterday it released its first update to 2006.
The highlight of the update is that GFMS is tipping a return of investor buying which will see the gold price clear US$700/oz by year end. It bases its view on the converse view that the huge US deficit will place pressure on the US dollar. Were there to be some conflict with Iran, GFMS suggests a much higher price in 2007.
The analysts aren’t surprised by recent weakness (note that this report would have been prepared at least some days ago) given uncertainty in the jewellery sector, but note that a weak US housing sector is potentially what will bring the investors back.
GFMS does, however, hedge its bets, suggesting that a weak US economy coupled with a slower Chinese economy will force down commodity prices and drag the gold price down with it. But the counter to this is the “flight to quality” argument, with the US dollar unlikely to be preferred as a safe haven over gold under such circumstances.
If the gold price were to rally, GFMS suggests there won’t be any offset from the supply side. The analysts are expecting central bank selling under the Washington Agreement to undershoot the quota, which is bullish, although conversely they are not expecting a significant diversification from the US dollar to gold by other central banks.
Global mine production fell 1.5% year-on-year in the first half of 2006. The biggest decliner was Indonesia, with South Africa, Australia, the US and Canada also registering declines. There were, however, notable gains in South America, and less significant gains in Mali and China. GFMS expects full year 2006 production to be essentially equivalent to 2005.
Net official sector sales in the first six months fell to just 170t, down 60% year-on-year. Full year sales are forecast to be under 400t.
Scrap supply increased by 50% in the first half, driven by the exceptional price rally. The offset was in jewellery demand, which fell 30% over the same period. Most notable were falls in demand from India and the Middle East.
Net producer dehedging contributed to first half demand at 300t, most of which came as a result of Barrick’s acquisition of Placer Dome. Second half dehedging is expected to be much lower at 100t.
Implied net investment in the first half was a solid 170t, yet this figure paled against the 500t of the second half of 2005.
While the GFMS numbers (historical, not predictive) are taken as gospel by many in the gold market, the reality is that the “net official sales” figure is seriously questioned across the market. GFMS keeps track of such sales in order to provide a definitive measure of the total amount of gold held by central banks.
However, under the IMF rules the practise of gold leasing, whereby a central bank, or investment bank acting for a central bank, can borrow gold and sell it into the market for later return, is not accurately measured, such that the amount of gold sold can effectively be significantly more than is “officially” stated.
Moreover, gold derivative positions, whereby gold can be sold ahead of later delivery or cash settlement can also be a mystery. The upshot is that there may well be a lot less gold held in vaults than is accounted for by GFMS, or a lot more short positions in the market that can be covered by immediate reserves.
This is the belief of the Gold Anti-Trust Action Committee (GATA) which has significant support from gold traders around the world. The accusation is that the US central bank and other world central banks have for many years sold gold down hard in times of apparent weakness in order to maintain an inflated value for the US dollar (or at least to prevent the collapse of the US dollar). The severe sell-down in May has been attributed to such unofficial sales, and questions have been raised about the recent significant fall from US$650/oz to under US$600/oz.
It is for this reason that GATA and its supporters believe the gold price must go significantly higher, particularly when there remains insufficient stock to maintain such a lid on prices.
GFMS strongly rebuffs the GATA view.
