Philip Klapwijk, Chairman of the independent metals research consultancy, GFMS, says, “on balance, we’re still favourably disposed towards the [gold] price in the medium term. That’s mainly because we see it as highly likely that debt monetisation and ultra-low interest rates, especially in the US, will at some point feed through to a build in inflationary pressures. Throw in dollar weakness and disappointment over conventional assets as the ‘green shoots’ argument withers and then gold well over $1,000 becomes perfectly feasible.” Klapwijk made this announcement at the release of the company’s Gold Survey 2009 – Update 1 yesterday – its latest report on the gold market. The consultancy warned that the path to this may be rough though, as a brief dip could occur in advance of longer term strength; adding that the recent spike could readily unwind as its foundations looked ‘shaky’.
The update commented that the bull run in gold prices is far from guaranteed to continue. The basis for this is still possible, according to GFMS, “but a less likely reversal in trend would be the various monetary and fiscal stimulus programs failing to rejuvenate the world economy. It [is] expected that its impact on gold would in turn probably be magnified by investors seeking out the security of US Treasuries, which would act to boost the value of the US dollar.”
H1 2009
The report believes that, in the first half of this year and in particular during the very early weeks, it was counterparty risk that investors feared most. Klapwijk noted, “It wasn’t surprising that in the wake of the collapse of Lehman Brothers and other financial institutions, people should choose to park some of their capital in gold very specifically because it essentially has no counterparty risk.”
Some market observers may have felt that investment ‘under-performed’ in the first half, given that it failed to rally the gold price over $1,000. However, the consultancy believes this judgement to be somewhat unfair and that more emphasis should be placed on the amount of bullion the jewellery sector was buying. In the first quarter, jewellery fabrication collapsed and was overtaken in scale by scrap, which boomed to almost the same size as mine production (almost 900 t), according to the report. There are two main reasons for this event, says GFMS – the onset of a global recession and currency weakness in various consuming countries translating into record local gold prices. Klapwijk added, “as soon as we saw, early this year, that countries like India, Turkey and Italy had become net bullion exporters, it was obvious to us that the rally should soon grind to a halt and probably go into reverse.”
GFMS: “A key reason as to why gold prices did not collapse after the rally topped out was the restrained nature of supply, with, for example, scrap retreating as near market supplies dried up and first half official sector sales slumping.” The latter was believed to be of particular significance since, as Klapwijk noted, “not only did we lose the actual impact of the heavy selling that we’d seen in previous years but the low level of sales must have assisted investor sentiment and that was at a time when many could have cut and run if they thought the longer term outlook for gold was turning shaky.”
Mine supply
The consultancy felt that mine production has been slightly negative for the price, with GFMS statistics showing a first half year-on-year increase of a respectable 7%. The growth was mainly driven by a rise in output from established operations in Indonesia, China and Russia, and supported by the onset of a raft of new projects, predominantly in Australia and Canada.
According to GFMS, notable gains in west Africa were dampened somewhat by South African losses. Producer cash costs remained almost flat in the first half, halting the trend of strong costs inflation of recent years. The market also had to face the slump in producer de-hedging, although its price impact was constrained by it largely reflecting just the greatly reduced scale of the outstanding producer hedge book and not a shift by some miners in favour of fresh hedging.
Net de-hedging slumped in the first half to around 30 t, leaving the book at end-June standing at just below 460 t. This low net figure was determined largely by the limited scale of the outstanding producer hedge book, due to the previous years’ heavy de-hedging. Miner AngloGold Ashanti made the only cut of note, as it continued to restructure its hedge book. Fresh hedging, totalling some 20 t, was seen by Catalpa Resources and Apollo Gold in the first quarter.
Investment and de-hedging
The net official sector sales in the first half contracted sharply, by almost 75% year-on-year to total around 40 t. The acute fall was mostly attributable to lower disposals from the CBGA signatories, as well as modest net purchases from countries outside of the agreement. Sales were concentrated in the first quarter and the official sector was in fact a net purchaser in the second quarter.
Implied net investment rose markedly in the first half to reach over 990 t, an increase of more than five times compared to the first half of 2008, with most of the inflows occurring in the first quarter. Demand for official coins almost doubled, whilst offtake for medals and imitation coins dropped by almost 60%. Nonetheless, world investment (the sum of the implied figure, official coin demand, medals and imitation coins, and bar hoarding) leapt by almost 180% year-on-year.