WHAT GOES UP...

Related articles

Metals gurus at GFMS see bumpy ride ahead for gold

Researchers at precious-metals consultancy GFMS, which on Wednesday launched the latest version of its annual Gold Survey, expect that investment...

Chinese gold output surpassed SA in '07

After more than a century on the throne, South Africa has been deposed as the world's biggest producer of gold, with its estimated 2007...

Precious metals consultancy GFMS, which earlier this year correctly predicted that the price of gold would rise above the $1 000/oz mark before Christmas, expects that the yellow metal will continue to rally at least until early 2009, research director Neal Meader said in Toronto on Wednesday.

Presenting the findings of the group's Gold Survey 2008, Meader said that the price of gold would likely reach a peak, perhaps around $1 100/oz, either in the last quarter of this year or in the first half of 2009.

However, he pointed out that the subsequent correction, which GFMS expects will take the price to levels around $600/oz in the longer term, represented a shift from previous forecasts.

“I think that's important to bear in mind ... previously, in all our forecasts we were only talking about the push being one way – higher - but now I think it's very possible to start seeing the end game,” he commented.

“I think we would say...we've got another 12 months of strong prices, and after that we would expect to see the market turn; it could be 18 months.”

Gold prices were pushed skywards in the fourth quarter of 2007 and the first few months of this year, largely by investment demand, as a weakening dollar, the US credit crisis, inflation concerns and geopolicital tensions and uncertainty raised the metal's attractiveness as a safehaven, or weath-preservation investment.

The price of gold set a new high of $1 033,70/oz on March 17, but has since corrected, and was trading at around $930/oz on Wednesday afternoon.

Nonetheless, despite the recent fall, Meader pointed out that all the drivers behind the rally of the last year were essentially still in place, with little prospect of increased supply from the world's gold mines in the medium term.

JEWELLERY SLUMP

On the other side of the demand coin, higher metals prices do, however, lead inevitably to a slowdown in demand for gold jewellery.

While GFMS estimates that global jewellery fabrication rose 5% last year, growth was entirely in the first half, before the price surge, with fourth quarter demand dropping by over 20% year-on-year.

Further, looking ahead, Meader expects a “substantial drop” in fabrication demand, as both manufacturers and retailers contend with high and volatile prices.

“In 2007 the gap between mine production and jewellery fabrication was only around 70 or 80 tons, but now that we have moved into 2008, that gap is going to open up to around 400 or possible 500 t,” he said.

“So there's an awful lot of physical metal there that investors have to be willing to fund.”

This market imbalance would be unsustainable in the medium- to long-term, “and in the light of that, we are expecting at some point that prices will fall, and fall quite heavily”, Meader said.

PRODUCTION SQUEEZE

The latest report from GFMS confirmed initial estimates, first published in January, that China had snatched the title of the biggest gold-producing nation from South Africa, where production declined 7,4% compared with 2006.

Total global gold production contracted 0,4% in 2007, to an eleven-year low, according to GFMS's tallies.

Africa reported the heaviest regional drop, at 29 t (chiefly due to South Africa), while output in North America and Latin America also fell (largely thanks to US and Peruvian losses).

In contrast, Asia reported gains, mainly from Indonesia and China.

At a company level, the top five producers, Barrick Gold, AngloGold Ashanti, Newmont Mining, Gold Fields and Harmony Gold all reported production declines.

Interestingly, according to GFMS's figures, AngloGold Ashanti snuck past US-based Newmont Mining last year to become the second-biggest gold-miner by production.

GFMS expects that global mine production in 2008 will remain broadly in line with the level recorded in 2007, Meader said.

Global cash costs in US dollar terms rose 25% in 2007, which was partly because producers seized on the high gold-price environment to undertake development and waste stripping work.