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 Spurred by
inflation concerns, gold peaked at a new 18-year nominal high at US$ 480.25
on October 12, despite a stable dollar moving within a narrow trading range
around US$1.20 against the euro. Consumer-price
index data revealed an increase of 1.2% in September, boosting the annual
rate to 4.7%, the highest level since 1991. Producer-price index data showed
an even stronger increase of 1.9% equal to an annual rate of 6.9%, driven by
higher oil prices and the impact of hurricane Katrina.
Increasing inflation, resulting in higher interest
rates, will have a negative impact on economic growth, and might lead to
stagflation for which I have warned earlier. The consequences are lower
equity prices for both bonds and shares with gold in turn offering a
safe-haven alternative, enhanced by ongoing threats of terrorist attacks.
Based on this scenario, I turned bullish on gold
since May of this year. Earlier, I had a neutral view for the first half of
2005 because of the fundamental equilibrium in supply and demand, in concert
with my vision that the dollar would recover against the euro.
My view turned out to be correct since the price of gold, compared to the 2004
year-end price of $ 438, touched a low of $ 418.35 at July 15 first, before
it recovered and reached its new 18-year high.
Particularly the to be expected impact of the
ongoing increase of oil and gas prices, as well as base metal prices,
particularly copper and zinc, on inflation, driven by strong Chinese demand,
turned me to become more bullish on gold.
Also, the fundamental outlook has improved,
particularly since demand for gold jewellery has been increasing. Figures
released by the World Gold Council show that in the first half year of 2005
gold jewellery offtake was 17% higher in tonnage
terms at 1,411 tonnes and 25% in dollar terms, compared to the same period of
2004. The increase was particularly driven by demand from Asia, including a
record offtake of 277 from India in the second quarter (second quarter
2004: 188.4 tonnes), as well as from the Middle East and Turkey. In
total, jewellery consumption increased by 201 tonnes in the first half year
of 2005, compared to the same period in 2004.
On the other hand, retail investment still has
problems to accustom to higher gold prices, showing a decline of 26 tonnes
compared to a decline of 29 tonnes in the first half of 2004. This decline
was offset however by an increase of Exchange Trader Funds and similar
products from 21 tonnes to 87 tonnes. But in the second quarter of 2005 there
was an outflow of 2 tonnes compared to 87 tonnes of demand in the first
quarter. Showing a record demand of 113 tonnes in the fourth quarter of 2004,
ETS’s might show a relatively strong decline
in the current quarter.
In summary, the question is whether the increasing
demand from gold jewellery, supporting a further increase of the gold price,
can be maintained. At the same time, price-elasticity of gold might result in
lower investment demand at a current price of gold around $ 470. On the
supply side, mine production will remain stable around 2,500 tonnes. Fears
from declining production in the next years are not justified, as new
projects coming on stream from 2006, replacing production from the closing of
old mines. While production in South-Africa will further decrease because of
rising costs and the relative strength of the Rand,
production from emerging regions will compensate for the declining production
from traditional regions.
Since 1994, South Africa gold output
decreased 241 tonnes from 854 tonnes to 343 tonnes, equal to respectively 26%
and 14% of global gold production. Within the same 10-year period, the
production from emerging countries, excluding Russia/CIS (former USSR),
increased from 178 tonnes to 697 tonnes, of which 145 tonnes from
West-Africa, compared to 57 tonnes 10 years ago.
In contrast to base metals, which in contrast to
gold have a primary industrial function and have very limited stocks which
cannot be replaced, there is no actual shortage in future gold supply as the
average gold reserves of the 10 major gold producers, almost representing 50%
of world gold output, amounts in average more than ten times annual
production.
According to Metals Economics Group’s
preliminary 2005 estimate, world-wide nonferrous exploration budgets will
reach US$ 5.1 billion, just shy of the high-mark of $ 5.2 billion set in 1997
at the peak of the last exploration boom. Regionally, Latin America continues
to be the most popular destination for exploration spending, followed by Canada, and then Africa.
While gold exploration budgets continue to exceed
base metal budgets in dollars, base metals show the greatest dollar increases
in 2005. Copper exploration budgets increased substantially, but the real
standouts are zinc exploration budgets, which increased about 90%, and nickel
exploration budgets, which increased almost 65%.
Late-stage exploration has become increasingly
important in the current exploration cycle, as juniors prepare projects for
joint-venture or acquisition, and mines push to bring projects to production
in order to take advantage of historically high metal prices.
The total budgets for late-stage exploration (including feasibility work) have
exceeded grass-roots exploration budgets for the first time since Metals
Economics Group began publishing the Corporate Exploration Strategics series of studies in 1989.
Accordingly, a growing number of new gold mines will
come on stream within the next few years to maintain gold production at
current levels, including Newmont Mining, Barrick
Gold and Placer Dome.
In conclusion, in my view, the gold price remains
primarily dictated by the course of the dollar, which will remain the
indisputable key currency in the world for at least another 5 years, and for
the short-term protected against both the euro and
the yen by stronger US economic growth as well as a growing gap in interest
rates.
In this respect, it is noteworthy that while the
dollar has stabilised since mid-2005, the gold price showed a relatively
strong increase of approximately 10%. From a monetary point of view that
would implicate that either the dollar or the price of gold has to come down
in the intermediate term.
While I remain bullish on gold for the longer term,
although not joining the opportunistic gold guru crowd predicting $ 700 plus
for gold within the next few years, I think that the odds are in favour that
the gold price will retreat to a trading range from $ 450-470 rather than to
tackle the $ 500-hurdle shortly.
This vision is underpinned by the strong growth of
the net long speculative position on Comex/Nymex,
which at October 11 reached a 12-month high of 21.27 million ounces of gold,
compared to a 12-month low of 3.82 million ounces and a 12-month average of
12.79 million ounces.
These figures demonstrate that there is a lot of speculation fuelling the
market, which actually should have driven the gold price above $ 500 already.
With the upward price trend having been stopped in accordance with a stable
dollar, I expect that the record speculative position of Comex/Nymex
will come under pressure and result in a mild correction of the gold price
until year-end.
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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