St. LOUIS (ResourceInvestor.com) -- Look for gold’s rally to continue and hit a record level for an average of $690 over the second half of the year, says precious metals consultancy GFMS.
In its Gold Survey - Update 1, GFMS forecasts that safe-haven buying over the final six months of 2007 should support the gold price, outweighing liquidation due to subprime worries.
“GFMS’ take on investment’s potential to drive gold higher was the key to our forecast that the price would finally crack $700 this year,” said GFMS executive chairman Philip Klapwijk at the consultancy’s seminar in London.
“It’s maybe breached that a bit earlier than we were expecting… But I don’t think it’ll be a problem sustaining these elevated levels. We may not be completely out the woods as regards speculator sell-offs to raise cash or reduce leverage in our new world of subprime jitters, but the norm of safe-haven buying should dominate investor activity from now on.”
Effects of the subprime market have the potential both to reduce the gold price in the short term and boost it in the medium to long term, although investors will generally remain positive toward the metal through the year, predicts GFMS.
“... In the short term, liquidations are certainly possible, particularly as continued crises in global markets could once again force speculators out of long positions in gold,” the consultancy said in a press release highlighting key points of Gold Survey - Update 1.
“In the medium term, nevertheless, continued revaluation of the risk-return trade-offs of traditional investments, the persistence of tensions in the Middle East and good underpinning by gold’s fundamentals are expected to continue to attract investors with a longer-term outlook to the metal, providing essential fuel for a continued bull run towards and eventually to a fresh 26-year high.”
De-Hedging Hits ‘Unprecedented’ Levels
Because gold’s rally is being sustained by only the one main price support of investment, volatility is expected to jump, GFMS said.
One reason for that forecast is the “unprecedented” levels of gold producer de-hedging in the first half. De-hedging amounted to more than 300 tonnes in the first six months of the year - leaving producers’ outstanding positions at the lowest level since 1995 - but the consultancy expects second-half de-hedging to drop to a range of 100 to 180 tonnes.
“Central to the cut in the hedge book were weighty book reductions involving all of the world’s top four gold producers, amounting to 205 tonnes between them. Barrick [NYSE:ABX; TSX:HCX] led the assault on the global hedge book, eliminating 78 tonnes of contracts to leave the company’s production un-hedged until 2010. Newmont [NYSE:NEM], Lihir [Nasdaq:LIHR] and Gold Fields [NYSE:GFI; LSE:GOF] completely cleared their outstanding commitments, together totalling 129 tonnes, while other significant contributions came from world number two, AngloGold Ashanti [NSYE:AU], and Buenaventura [NYSE:BVN], which reported net reductions of 44 and 31 tonnes respectively,” GFMS reported.
Jewellery Fabrication Demand Grows
Although GFMS does not describe jewellery fabrication demand as a key factor in supporting gold’s rally because of its price sensitivity, increasing demand in that sector “provides good bedrock support to prices,” the consultancy said, especially when investors seem to be losing interest in gold.
Jewellery fabrication demand grew by 23% in the first half year-on-year, and second-half forecasts expect a growth of 6% year-on-year.
However, “the timing and extent of any rally could alter that forecast for jewellery,” Klapwijk warned. “We’d certainly factored in scope for a price rise on the back of U.S. subprime contagion fears, but the recent price move, which perhaps came a little earlier than we were expecting, may leave the jewellery industry with a strong sense of unease.”
First half growth was aided by strong demand in China, India and the Middle East, but reports show that the current high price of gold is resulting in diminishing demand, even as India - which accounted for 70% of the first-half growth - enters its festival season.
Mine Production Up but Expect a Dip
Global mine production was up almost 3% to 1,201 tonnes in the first half of 2007, thanks to Indonesia and China.
Indonesia saw an 83% surge in first-half output due in large part to significant finds at its Grasberg mine. China is in the running to become the world’s top gold producer with an output of 129 tonnes in the first half - establishing itself in second place after seven years of substantial growth. Africa and Latin America, on the other hand, recorded losses in output in the first six months.
“Such phenomenal growth in output has placed China on course to surpass South Africa if current trends continue,” Jon Nadler of Kitco Bullion Dealers said in a note. “There seems to be hardly anything that China set its sights upon that cannot be achieved, save perhaps for controlling inflation and various asset bubbles in their economy.”
Global production in the second half is expected to post a modest drop, especially if Indonesia experiences its forecasted decrease in output, said GFMS. Full-year production, however, is expected to remain higher than last year.
Gold Trends and Speculation
Looking at data from the past five years, gold tends to hit seasonally higher prices in December. Last year was an exception, when gold hit a high of $725.25 in May but dropped to $616 in December.
Its bull run showed a modest 9% gain in average prices between 2004 and 2005, especially compared to its 36% surge in average prices between 2005 and 2006. If GFMS’ prediction of $690 this year is correct, we can expect around a 14% increase in the average gold price compared to last year.
Many analysts agree that gold will stay strong, at least in the short term.
“Given that the dollar remains under serious pressure and oil remains near all-time record highs and neither are expected to reverse these trends in any significant way, gold is well supported,” said Mark O’Byrne, director at Gold and Silver Investments Ltd., in a research note.
James Moore of The Bullion Desk concurred: “Ultimately…the sentiment is still bullish as the dollar remains on the defensive, producers cut their hedge books, investors increase their ETF holdings and record oil prices generate fresh inflationary pressure.”
GFMS cautions, however, that heavy liquidations by short term speculative players, particularly in the second quarter this year, were the chief factor behind the first half recording sizeable implied net disinvestment of over 200 tonnes.
According to the consultancy, this was very much the product of temporary overspills from non-gold issues, such as June’s bond market crisis. GFMS reports that there was scant evidence of any longer term investors losing confidence and instituting strategic shorts.
Looking at this data, Nadler warns, “This market remains very much a two-way street.” He reminds us that “the investment component of this 77-month rally is the key factor to sustainability.”
