Likely US slowdown expected to stoke gold rally
Charlotte Mathews
Resources Editor
A HIGH probability of a sharp slowdown in US economic growth and a slide in the dollar are likely to continue driving investment in gold this year, says precious metals consultancy GFMS in its Gold Survey 2006, launched yesterday.
The main reason for gold’s current strength is investment demand rather than jewellery manufacturing, says GFMS chairman Philip Klapwijk.
Inflationary pressure and political tension in the Middle East should also boost demand for gold.
As the gold price performed well, it would attract new investors.
“We’d only need to see a tiny slice of mainstream assets diverted into gold, which comparatively is a pretty small market, and the price could really take off,” he says.
Despite the sharp increase in the gold price, jewellery demand rose 100 tons in the first half last year and tapered off in the final quarter.
While jewellery fabrication in east Asia rose to its highest level since 2001, Italian jewellery fabrication fell to its lowest level since 1988. Price volatility also encouraged sales of gold scrap, which surged in the fourth quarter.
Klapwijk says trends in the first quarter showed continued weakness in jewellery offtake, with Turkey’s imports of gold in the first quarter falling 60% year on year. Jewellery demand could slump about 500 tons this year, which is not sustainable.
Global gold mine production is increasing, the survey showed.
It rose 2% last year to 2 500 tons, mainly from Latin America and the Grasberg mine in Indonesia.
South African gold production fell to its lowest level on record as mines were closed because of the high-cost domestic environment. SA and Australia remained the highest-cost gold producers.
Global mine production should be 4% higher this year as new mines come on stream or increase capacity.
Last year, gold producers also dehedged less than in the previous year. Hedging is selling future gold production at fixed prices and dehedging is reducing those commitments.
The dehedging was not because the mood had changed to favour gold hedging but because of unusual circumstances, including a slowdown in delivery by Barrick and a slight increase in hedging by AngloGold Ashanti after a substantial decrease in 2004.
GFMS expects dehedging to be 200 to 300 tons this year.
Sales of gold reserves by central banks rose almost 40% to a record level of more than 650 tons last year, mainly from signatories to the Central Bank Gold Agreement, which limits central bank to selling to specified levels each year.
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