OT.Gold Fields sees gold supply declining
By James Regan
SYDNEY, Sept 26 (Reuters) - South Africa's Gold Fields Ltd said on Wednesday a decline in the global supply of gold was looming as mine activity wanes and some central banks exhaust their sales.
"It is coming clear there is a mine supply slowdown coming," Gold Fields chairman and chief executive Chris Thompson said.
"It's a few years out, but it is on the edge of the radar screen and moving down towards us noticeably," Thompson told a media and analysts' teleconference.
World demand for gold by consumers was 3,946 tonnes last year against mine production of 2,573 tonnes, industry figures show.
Thompson also said that gold sales by central banks outside of the Group of 18 who agreed in 1999 to limit sales, were now only occurring sporadically.
The agreement has come to be called the Washington Agreement, involving Western European banks who agreed to limit sales to a total of 400 tonnes a year for five years.
"These central banks outside of the Washington Agreement who wanted to mobilise their gold appear in large measure to have done it already," he said.
The possibility of sales from central banks -- collectively estimated to hold up to 50,000 tonnes of gold or more than 15 times annual world demand -- have weighed on bullion prices for decades.
HEDGING A DRAG
Thompson said another drag on bullion prices, hedging or selling future gold production forward at fixed prices, was also falling out of favour, lifting artificial price caps on the precious metal.
"The incentive to hedge driven by low interest rates and the higher cost of gold borrowing has taken all the profit out of hedging," he said.
Gold Fields does not hedge it annual production of 3.8 million ounces, preferring to provide investors with the full potential of any upside price movements.
Australia's gold mining sector, the world's third largest behind South Africa and the United States, has embraced hedging over the years to guarantee revenue streams.
Analysts estimate up to 1,500 tonnes -- five years Australian production -- is sold forward.
Thompson said recent increases in the U.S. gold price coupled with depreciation in the Australian currency against the U.S. dollar had jeopardised the value of Australian miners' hedge books.
Gold prices gained about 20 dollars per ounce in the aftermath of the air attacks in New York and Washington.
The Australian dollar was fetching around 49.65 U.S. cents, compared with an August peak of 53.94 cents.
Gold Fields this week said it was acquiring the main gold assets of WMC Ltd in the Australian outback, but would not carry the existing hedge positions, estimated at 3.5 million ounces.
Hedging allows a company to guard against falling gold prices by selling future production at a fixed price. But it can backfire when bullion prices rise, as was the case on Friday.
Ironically, a proliferation of hedging has placed mining companies and other investors in gold at risk if bullion prices rise too much.
The plight of Ashanti Goldfields Ltd and Cambior Inc
, which were forced to restructure in 1999 after a price surge sparked by the Washington Agreement tipped their hedge books out of favour, highlighted the downside risk to industry hedging.
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Copyright © 2001 Reuters Limited.
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