Gold could rally above $700/oz before year-end: GFMS

Gold could rally above $700/oz before year-end: GFMS

New York (Platts)--14Sep2006

With the return of investors to the market, gold could rally past $700/oz
before the end of this year, according to Gold Survey 2006--Update 1, released
Thursday by the London-based research firm GFMS.
"Pretty much all the conditions are still there for a big uptick in
investor interest," said Philip Klapwijk, executive chairman of GFMS. "As
ever, these center on the dollar and we're still bearish on that given the
huge US trade deficit." In 2007, gold could even move higher, particularly if
a major event occurs--such as US military action against Iran.
Klapwijk noted that recent weakness in gold prices "hasn't surprised us
that much, as there's little around to drive the price up at the
moment--certainly with the jewelry sector still looking shaky--until the
investors come back in force. But we could be getting close to the start of a
big move higher."
According to Klapwijk, "If the US economy really does come off the boil
and Chinese [economic] growth falls heavily, we could see widespread price
corrections across the commodity spectrum." Gold could get caught in the
downdraft, he said, "but we think, on balance, we'd see more of a flight to
quality and that would sustain gold, if not push it higher."
GFMS does not expect any rally to be derailed by the supply side. Net
central bank sales, for example, are forecast to fall a fair amount in the
second half. The year-on-year drop in official sector sales in the second half
was broadly expected to counter the forecast very slight increase in mine
production and the relatively modest increase in scrap.
Klapwijk noted: "Some people might be surprised that our forecast for
second-half scrap is just a 5% rise but, if you have a sluggish third quarter
and the rally doesn't really come about until sometime into the fourth, you
can't expect too much to come out. Also, we've already seen how expectations
in India of further price rises could limit scrap and we could well see a
repeat of this."
Jewelry demand is expected to decline during the second half of this
year, just as it declined in H2 last year. This forecast is based on the
expectation of higher gold prices, which tend to discourage consumer purchases
of gold objects in India and the Middle East.
Largely as a result of higher prices and volatility in the gold market,
jewelry fabrication slumped by more than 400 mt, or nearly 30%, in H1; if
scrap is excluded, the decline was more severe at over 40%. Other fabrication
demand rose 8% in H1, largely as gains in electronics and official coins
outweighed losses for dental and other industrial & decorative sectors.
Another area of weakness was de-hedging, which GFMS forecast to fall
sharply from the high level seen in H1. GFMS noted some fresh hedging had
occurred, but the bulk of this remained linked to project finance and not
"opportunistic exploitation" of high prices.
Net producer de-hedging made a strong contribution to demand for gold
bullion in H1, reaching just under 300 mt. The more than three-fold increase
year on year was largely due to the elimination of Placer Dome's open hedge
position, closed out by Barrick following its acquisition of the major.
Second-half de-hedging is expected to be far more modest at a little under 100
mt.
Implied net investment fell to about 170 mt in H1 this year,
substantially lower than almost 500 mt in H2 last year. As for the other forms
of investment, bar hoarding fell by 80 mt, chiefly as a result of the price
rise and with East Asia, in particular Japan, largely responsible for the
decline, according to the report. Sales of official coins were up by more than
10 mt. World investment (the sum of the implied figure, bar hoarding and
coins) in H1 was 330 mt, up sharply year on year, but down notably from 620 mt
in H2 last year.
Mine production of gold declined by 1.5% year on year during H1 to 1,168
mt, according to GFMS. The biggest single decline came from Indonesia, while
substantial losses were also seen in South Africa, Australia, the US and
Canada. Notable gains, however, were recorded in Latin America and, to a
lesser extent, Mali and China. Gold production rose 20%, or about 40 mt, in
Latin America during H1, compared with the H1 2005 level. Full-year world
output is forecast to be largely unchanged from 2005 levels for which GFMS did
not provide statistics.
Net official sector sales fell to 167 mt in H1, down 60% from the
corresponding period of 2005, GFMS said. The decline was driven primarily by
falling sales from signatories to the second Central Bank Gold Agreement;
countries outside the CBGA were modest net purchasers.
"We expect CBGA sales to accelerate in the fourth quarter of 2006,
failing, nevertheless, to exceed the levels recorded in the last three months
of 2005," said Klapwijk. Full-year total net sales are forecast to dip to a
little below 400 mt. GFMS believes it is unlikely that a further 163 mt could
be released before September 26, which will mark the end of the second CBGA
year.
Scrap supply rose by around 50% in the first half of the year, with the
increase driven overwhelmingly by the gold rally. Most of the main regions
generated notably higher flows, especially the Middle East, though the Indian
response was relatively muted.
--Ovid Abrams, ovid_abrams@platts.com

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