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 In the November/December
issue of Goldletter International, I already noticed that boosted by Asian
demand, gold had breached finally through the psychologically important $ 500
barrier. The question is, however, whether the price increase was caused by
growing physical demand, rather than by speculation.
While net long speculative position on Comex/Nymex in November
increased from 16.03 million ounces to 18.05 million ounces, the position
increased only modestly further to 18.92 million ounces by the end of
December 2005, compared to a peak of 21.4 million ounces in October 2005. Consequently,
the Comex/Nymex was not the driving force behind the increase in the gold
price this time. This was accounted for by aggressive Japanese buying through
the TOCOM (Tokyo Commodities Exchange) as a currency hedge against the Yen,
which had fallen by over 10% since the beginning of September 2005 to a level
of Yen 120 against the dollar. While the net future Comex/Nymex position
stayed relatively stable, trading in Japanese TOCOM gold contracts showed a
strong increase, which caused the authorities to raise the margin
requirements on its precious metals contracts.
Compared to a year-end 2005 close of $ 513, the gold price was driven
up by 9.5% to a 25-year high of $ 561.75 on January 16, compared to an
increase of 17.1% during the year 2005.
The surge of the gold price is quite remarkable as during the same
period the dollar was easing only modestly against the euro and a lack of
fundamental support was demonstrated by lesser fear for inflation with the
oil price having traded lower until recently. Also, long-term interest rates
still remain at a historical low level due to growing of liquidity surpluses
available for investment, thereby keeping inflation down.
Nevertheless, I noticed already earlier that after demand and supply
had been in balance since some time, the odds are looking to turn in favour
of a shortage in supply, with new developments occurring both on the demand
and supply side.
Positive for demand has been the increase in Gold ETFS (gold exchange
traded funds), which are expected to have increased to approximately 350
tonnes in 2005, an increase of about 200 tonnes compared with 2004. Also
positive has been increasing investment demand from Asia and the Middle East,
the latter enhanced by strongly growing revenues from increased oil revenues
by the OPEC countries.
However, with the gold price having further increased to a current
trading range of $ 540-560, growing price elasticity above $ 500 could have a
negative impact on overall investment demand, at least in the first half of
2006, resulting in a correction of the gold price.
At the supply side I expect production to stabilise in the foreseeable
future, with a shift from traditional countries (South-Africa, Australia, US
and Canada) to new regions like West-Africa, South-America, Russia and
CIS-countries, but geopolitical problems in the emerging energy and mining
industries of undeveloped countries, requiring a higher stake in their
mineral wealth, could have a negative impact on future gold supply and cause
a squeeze in future supply.
Last but not least, it is the course of the dollar, which is a
determining factor for the behaviour of the gold price. In this respect it is
remarkable that while the gold price increased by 9.5% in dollars in 2005,
the dollar recovered by 15.4% against the euro.
The strong revival of the dollar was broadly unexpected, thereby
having increased the vulnerability of the gold price. This can only be
reversed when central banks who did not sign the Second Bank Gold Agreement
with the option to sell up to 600 tonnes of gold over the duration of 5 years
from end Sep-tember 2004, are deciding to purchase gold as a hedge against
the dollar. Rumours in that direction pointing at China
and Russia,
haven't become hard facts yet and have in my opinion to be taken for granted,
particularly as long as trade balance benefits from a stable dollar to the
economic benefits of emerging countries prevail.
I also expect that after a period of de-hedging, particularly new
producers could decide to use hedging again to secure future cash flows,
enhanced by a lesser easy access to bank loan financing on projects which are
only economically viable at today's high gold prices.
Decisions in favour for hedging should be considered as a serious option when
this creates added value to future cash flow, rather than to keep away from
hedging because the market is against it.
Even when the plusses and minuses would be in balance, and the gold
price would stabilise at a price level of around $ 500, this is still good
news for gold exploration and development as is demonstrated by a strong
increase in world-wide exploration almost back to the record level of 1997
before falling to a 12-year low in 2002.
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
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