REASEARCH & ANALYSIS

Thomson Reuters GFMS has launched its Gold Survey 2012 - Update 1. The following media release details some of the highlights from the briefing given at the launch by Philip Klapwijk, Global Head of Metals Analytics at Thomson Reuters GFMS.

Gold Survey - Update 1 provides GFMS’ first published estimate of what the fundamentals might look like for calendar 2012 and, with that done, it is of note that the consultancy remains firmly bullish, with the price expected to clear the $1,800 mark before year-end. However, it was felt unlikely that 2011’s highs of just over $1,900 would be surpassed. Klapwijk commented, “I think we’re on pretty safe ground saying that we’ve already seen the lows for the year and that firmer prices, particularly towards year-end, are on the cards, but we’re also expecting a bumpy ride looking ahead - any intensification of the Eurozone crisis or dashing of hopes for further easing by the Fed and you could easily see the rally derailed for a while”.

As intimated above, GFMS believe that gold prices will be strongly influenced by governments’ monetary and fiscal policies, particularly those enacted by the US administration. Klapwijk added, “we’ve recently seen how gold can react sharply to any prospect of more QE in the United States and we’re fairly confident that some form of easing is more likely than not in the end; we may have seen periodic items of good news on the US economy but that invariably seems followed by bad, and this is all before a probable slowdown in both European and Chinese economic growth. Neither can we ignore its domestic problem of the fiscal cliff, with all the uncertainty and recessionary potential bound up in that”.

The consultancy notes that looser monetary policy is to be expected both in the developed world and in emerging markets, such as China. All this was ultimately expected to undermine faith in currencies (and in particular the US dollar), stoke inflationary fears and lead to an extended period of ultra-low interest rates. The statistics in Update 1 show World Investment (the sum of all forms of investment) in the second half reaching a record in both tonnage terms (over 970 tonnes) and in value (an approximate figure $53 billion).

One development that lifted investor sentiment was further growth in already elevated levels of official sector buying to an estimated first half 2012 figure of just over 270 tonnes, chiefly as a result of an ongoing desire to diversify foreign reserves away from the US dollar. The consultancy also noted that this buying had been focused on price dips, providing clear support to the market over difficult times in late spring/early summer. Even though such opportunistic buying might reduce somewhat in the second half should the price rally strongly, the consultancy still expects a historically high net purchase figure of 220 tonnes and cautions that this figure could easily prove conservative.

Elsewhere on the demand side, the consultancy reports that jewellery fabrication in the first half fell by almost 13%, chiefly on account of a poor result in India, where offtake dropped in the face of record local prices, a lack of conviction in future price trends and a slowing economy. As for the second half, global jewellery demand is expected to grow modestly, even in the event of a price rally, partly as that latter move could bring back to life investment-related buying. Nonetheless, the consultancy has expressed concern about currently sluggish Indian buying and that Chinese offtake is not as robust as it had once been.

Even if fabrication demand underwhelms, its flipside, scrap supply, was not felt likely to rule out any price rally, with second half volumes forecast effectively unchanged year-on-year. The chief reasons ascribed for this were price accustomisation, a belief among some holders of scrap that yet higher prices were imminent and, perhaps most importantly, a decline in near-market stocks. Other aspects of supply were also not thought obstructive. Mine production, for instance, was forecast to increase in the second half but only by 24 tonnes and GFMS’ estimate of full year output is now lower than once expected, chiefly as guidance on a slew of projects has been marked down. Also of significance was the ongoing absence of producer hedging; Update 1 shows this staying on the demand side in the second half as a modest 12 tonnes of net de-hedging is forecast, illustrating the extent to which equity investors continue to militate against such activities.