Warning bells sounded for gold

Allan Seccombe | Thu, 15 Apr 2010 17:55
[miningmx.com] -- IF Indian holders of gold decide to start selling their metal as scrap and sentiment turns sour by other investors, the gold price could come crashing down, seriously hurting mining companies who are spending between $717 and $950 on each ounce of gold they extract. It’s a sombre warning indeed for the gold market and producers that comes from Paul Walker, CEO of London-based metals consultancy GFMS. One of the core faults in the market at the moment is that the bedrock of demand, jewellery fabrication, has seen a hefty pull back because of high gold prices and the recession, he said at the launch of the 2010 GFMS Gold Survey. Gold jewellery demand fell 20% to 1,759 tonnes last year, a 21-year low. Investment in 900 tonnes of gold offset an almost 500 decline in gold consumed in fabrication. As a whole, demand for gold rose eight percent last year, with strong inflows into physical gold products like exchange-traded funds as low interest rates, worries over inflation and potential government defaults on debt drove investors into the market. “If and when we see investment demand weakening, I wonder how quickly the gold jewellery market, which was squeezed out by price rises, will rebound,” Walker said. World investment in gold doubled in 2009 to nearly $60bn and he questioned the sustainability of these kinds of inflows, which if they taper off, will see the gold price stagnate or pull back. “How this pans out over the next four to five years is critical to determining the gold market,” he said, cautioning if investors saw positive real interest rates “gold will really struggle”. “People have unreasonable expectations of that gold can do,” he said. “The end game for gold prices is being played out in the medium term.” His message of falling gold prices stirs the ire of gold bulls, who see a ‘stronger for longer’ scenario given the parlous state of the global economy and doubts about its recovery, particularly with the massive debt burdens in developed nations. The argument is this uncertainty means sustained investment demand in the metal, which is regarded as a safe place to store wealth, and steady to higher gold prices. To ease the fears of some in the market the U.S. Federal Reserve has made clear it will not monetise federal budget deficits by printing money, Reuters reported on Thursday. "We have politely made clear in all our speeches ... that we will not monetize the deficits," Dallas Federal Reserve Bank President Richard Fisher said on a panel at the Johns Hopkins University's School of Advanced International Studies, Reuters reported. $700 or $800/oz in next few years Walker told an audience in Johannesburg he was placing bets with friends that the gold price could fall to $700 or $800 “before the next few years are out”. For the first time, GFMS has included a section on what it is costing producers to get their gold to the market. It said the all-in-cost to produce an ounce of gold was $27 higher at $717 in 2009, including the total production cost, ongoing capital expenditure, indirect costs and overheads. The figures were drawn from a measurement of 70% of the Western world’s gold production. GFMS also estimates that the “true, fully loaded sustainable long-term cost of gold mine production stood between $925 and $950/oz in 2009.” This excludes any return to shareholders, but builds in greenfields exploration, project development and exploration. One gold source at the presentation argued this figure was too high and was seen by some at around $750 rather. A South African Chamber of Mines official, however, called the GFMS figure in the right “ball park”. If the gold price does retreat as investor interest fades leading to positions being unwound and physical metal coming onto the market, it will leave a good number of producers in a rather difficult position economically. Walker argued the fundamentals of supply and demand would then kick in as a primary source of gold shrank, pushing the gold price up again. “In three or four years the costing side will be a significant factor if there is a correction in the gold price,” he said. Interestingly, Walker defended GFMS’s stance on the gold price, saying there was a perception the consultancy was negative. He argued that since 2002 GFMS had been bullish and the stance now was one of warning on potential downside risks to the price over the next three years. Just over half of 166,000 tonnes of gold held above ground is in the form of jewellery. Walker said there was a structural change in the scrap side of the business, with infrastructures put in place in the United States, Japan and UK for people to sell their gold jewellery for cash. “This structural element really concerns me and it should concern anyone in this industry,” he said. He also sounded a warning bell if expectations in India of higher gold prices changed, saying it could lead to a lot of gold being scrapped. India is estimated to hold 16% of gold jewellery, North America 17%, East Asia 25% and Europe 20%.