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Rally in gold unlikely to run out of sheen, conference hears
news.ft.com
Published: November 18 2005 02:00 | Last updated: November 18 2005 02:00
The mood among gold bugs is more upbeat than it has been for many years. Gold prices are approaching 18-year highs. Even central bankers, who have been net sellers of gold for the past 40 years, have expressed conditional support for increasing their gold reserves.
Gold dealers have worried for the past two years that the rise in gold prices from their lows of $250 in 1999 would come to an end, simply because gold rallies have not lasted this long since gold was freely floated in 1968. But continued demand for the precious metal has continued to sustain the rally.
"I am getting calls from people I have not spoken to in 15 years asking me about gold," said one Swiss banker this week at the annual London Metal Bullion Market Association precious metals conference in Johannesburg.
In spite of the higher prices, jewellery demand is resilient, while investment demand has picked up through the launch of tracker gold funds, known as exchange traded funds. At the same time, gold mine supplies have remained flat.
Philip Klapwijk, executive chairman of GFMS, the precious metals consultancy, told the LMBA conference that gold was less important to central banks because they were more focused on yield and, with gold lending rates near zero, gold lending activity had dropped. However, central bankers said that gold still had an important role to play in their portfolios.
Mr Klapwijk said gold accounted for about 9 per cent of the $4,355bn of the central banks' global combined gold and foreign exchange reserves. This compared with gold's share of 15 per cent of the $2,011bn in total reserves held at the end of September 1999.
Maria Guegina, head of external reserves management division at the central bank of the Russia, said calculations by the Russian central bank found that about 10 per cent of reserves in gold would be appropriate. This compared with a current holding of 5 per cent, or 500 tonnes.
Central bankers from South Africa and Argentina made similar noises. Kenneth Rogoff, the former chief economist at the International Monetary Fund, told the conference that central banks in Asia that had accumulated large dollar reserves in the past five years should reduce their dollar exposure through diversification into other assets such as gold because there was a greater chance of a "serious global recession, and a higher probability of a nuclear attack on a US city in the next seven years". Such talk is music to a gold bug's ears.
Peter Zöllner, executive director of Oesterreichische Nationalbank, the Austrian central bank, said his bank held more gold than US-denominated assets, even though the bank has halved its gold reserves to about 300 tonnes in the past 10 years.
"Gold continues to be an important asset in a diversified portfolio because it provides stability against US dollar volatility," said Mr Zöllner.
Central bank gold holdings have been one reason why gold is unlike other commodities and is not valued on supply and demand trends, as the 31,000 tonnes in official bank vaults equates to about 10 years of annual demand.
However, official gold sales of about 500 tonnes a year since the Central Bank Gold Agreement in 1999 have helped balance the gold market, as mine production has remained relatively flat for the past eight years and is now not enough to fill annual gold jewellery demand. Gold output has matured among traditional producers - South Africa, the US, Canada and Australia.
David Davis, mining investment analyst at Andisa in Johannesburg, estimates South Africa's 2005 gold output of 300 tonnes to be the lowest level in 80 years, as higher operating costs from rising steel, diesel and labour costs, a stronger rand and declining gold grades have resulted in a 30 per cent fall in gold output in the past five years.
Mr Davis estimates that if no new gold reserves are found, current gold mine supply will fall to less than 50 tonnes in the next 25 years.
"The higher cost of mining and the gold supply outlook are becoming more of a factor on gold prices," said Paul Merrick, vice-president commodities at RBC Capital Markets. |
