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In the May 2006 issue of Goldletter
International I clearly indicated that the increase of the gold price to well
above $ 700 was driven by speculation and not by an improvement of the
fundamental outlook. The gold price doesn't run its own course and is
strongly dependent from the overall sentiment of the oil and metal markets,
driven by a strong physical demand from Asia.
The course of the gold price speaks for itself. Since the end of 2005
the gold price showed a dramatical increase from $
513 to an intermediary high of $ 725.75 at May 12, an increase of 40% within
just four and a half months, followed by a strong decline to an earlier
intermediary low of $ 567, at a decline of 22% in just five weeks. Some
bullish gold market watchers are calling this a sound correction, rather than
to acknowledge that the earlier rise of the gold price went out of control.
Based on the current balance in demand and supply, the impact of the
gold price having risen from $ 438 at the end of 2004 to above $ 500 in 2005, and a further
jump to above $ 600 in
the first quarter of 2006, had a negative impact on demand from the jewellery
industry, as has been demonstrated by a decline of 175 tonnes in the first quarterof 2006 against an inflow of 109 tonnes into
Exchange Trade Funds (ETF's).
The only question to ask oneself is at what price the price
sensitivity would find a balance in gold demand from the jewellery industry,
considering the strong decline of the gold price to an intermediate low of $
567 since then. This question appears to be answered by the strong recovery
to a current level of $ 650, but has been influenced by worries about global
stability and inflation, as a result of which the oil price hit a new record
close to $ 76 per barrel. While higher oil prices are considered to have a
positive impact on the gold price, history tells that this is only partly
true. Because of its specific characteristics based on a structural rise in
demand, the oil price in the last few years, like base metal prices, has
risen faster than the gold price.
I also have pointed earlier at the decline of gold's monetary role. While
the gold price has increased more than 50% from $ 417 at the end of 2003 to
the actual price level of $ 650, the value of the dollar over a period of two
and a half year against the euro is in balance at
around $ 1.27 for one euro.
Consequently, to listen to market watchers talking about a further
fall of the dollar to justify a further increase of the gold price doesn't
make any sense.
Nevertheless, with the gold price to be expected not to drop back
under the $ 600 level anymore, the outlook for the gold industry looks very
prospective. Despite a rise in total production costs from an average of $ 337 in 2005 at an
estimated 10% in 2006, the higher costs can be easily offset by the soaring
gold price since the end of last year. This will boost cash flow provided by
of major producers this year, as well as an upgrade in gold
reserves since most of these reserves are still valued at a price of $
400 per ounce.
By :
Marino G. Pieterse
Editor, Gold Letter
International
Marino G. Pieterse
has been an independent financial analyst and gold specialist for more than
25 years. He is the chief-editor of Goldletter
International, the only gold investment market letter in English in Europe focusing on emerging gold regions in the world,
as well as reports on individually featured companies and special reports on
other metals, including uranium. You can receive Gold Letter
International’s reports for free by clicking on the “Subscribe”
button.
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