FOCUS-Price panic seen behind record gold hedging
(Adds director's quote in para 4, S.Africa, Australia and Canada outlook in paras 17-21)
By Marius Bosch
LONDON, Jan 12 (Reuters) - Gold producers, panicking in a volatile price climate, hedged
445 tonnes of production last year compared with 88 tonnes in 1998, industry consultants
Gold Fields Mineral Services (GFMS) said on Wednesday.
GFMS said in an update to its Gold Survey 1999 released on Wednesday that fears of further price declines after gold touched
20-year lows in the third quarter of 1999 led to record levels of producer hedging, including around 360 tonnes in the third
quarter alone.
Gold's outlook for the first half of 2000 was more positive, with stronger jewellery demand and less producer hedging
expected to tone down the price impact of central bank sales and speculative short selling.
``We forecast producer hedging to decline dramatically from last year's high levels,' GFMS director Hester le Roux told a
briefing in Cape Town, South Africa.
The London-based consultancy said gold should average around $280.00 a troy ounce in the first six months of the year,
trading in a range between $265.00 and $305.00.
Gold fell to its lowest in two decades in late August 1999 in the wake of Britain's first gold auction, which reinforced market
fears of central bank sales.
But the market recovered to a two-year high in early October after 15 European central banks pledged in September to limit
gold sales, lending and derivatives activity.
CHANGE OF DIRECTION
Paul Walker, a GFMS director, told Reuters central bank sales and the hedging activities of producers helped drive the price
down to record lows in the third quarter of the year.
``I think it was panic hedging. We estimate that producers hedging added 360 tonnes to physical supply in the third quarter
alone. When looking for an explanation of the price fall, it is a very important factor,' Walker said.
The GFMS report said producers changed direction after the European central banks' announcement.
``Following the European agreement and the resulting price spike, producers changed direction and began large-scale
restructuring and buy-backs of hedged production. GFMS estimate that overall in 1999 net producer hedging came to 445
tonnes,' the update said.
It estimated that official sector sales were 441 tonnes in 1999, 399 tonnes of which was in the second half of the year.
``This includes a significant level of sales from outside of Europe, most of which are unlikely to be reflected in published
official statistics,' the update said.
OFFICIAL SALES SEEN ABOVE 10-YEAR AVERAGE
Gold's upside potential over the next six months will be constrained by the price elasticity of demand and a lack of investor
buying interest.
``Little positive impact from the European agreement on gold is expected in the short term, supply of liquidity is adequate and
official sector sales will be above the average level seen in the past decade,' the GFMS update said.
World mine production increased by one percent to 2,569 tonnes in 1999, with output in the top five producing countries
reducing on average by three percent.
Gold output in South Africa, the world's biggest producer, is expected to continue falling in 2000 while Australian production is
seen flat, GFMS said.
South African output fell four percent to 447 tonnes in 1999, extending a downward trend for the past number of years.
``This is typical of a mature industry with very deep mines that are expensive to mine and certainly in the immediate future I'll
expect the contraction to continue,' le Roux said.
Australian gold output eased one percent to 308 tonnes in 1999 and was expected to hold at that level this year.
``Canadian production fell last year and we're forecasting it to fall further this year at marginal, rather than large levels,' said
Phillip Klapwijk, managing director at GFMS, following a presentation in Toronto.
Production costs for miners fell slightly, with average cash costs at $197 an ounce over the first nine months of the year.
Total fabrication demand recovered marginally in the second half of the year but the full-year figure was still down 1.4 percent
on 1998, mainly due to lower gold use in jewellery while coin and electronics demand was up strongly.
Jewellery fabrication, which accounts for over 75 percent of world gold demand, was down last year, GFMS said.
``The estimated year-on-year decline of 2.8 percent (88 tonnes) can be attributed to the price spike in October, the legacy of
past low oil prices and increased competition from gemset jewellery,' the update said. |
