DEZ
Gold supply expected to contract in first half of 2006
By: Rhona O'Connell
Posted: '19-JAN-06 12:00' GMT © Mineweb 1997-2004
LONDON (Mineweb.com) -- In its second update of the Gold Survey 2005, GFMS, the London-based precious metals consultancy, estimates that net official sales during 2005 were at the highest level on record, but more significantly that net sales will drop substantially in the first half of 2006.
Elsewhere on the supply side mine production was up by 30 tonnes while de-hedging amounted to 195 tonnes, meaning that net mine supply actually increased by 263 tonnes to 2,299 tonnes against 2,036 tonnes.
Scrap return was up slightly, at 840 tonnes against 834 tonnes in 2004. This takes total net supply from these components for 2005 to 3,802 tonnes from 3,341 tonnes in 2004.
The high level of net central bank sales was a function of the higher sales volume coming through under the second Central Bank Gold Agreement, along with the collapse of gross purchases plus some opportunistic sales from outside the CBGA.
GFMS does say that it is possible that the estimate of 663 tonnes for 2005 may be revised downwards as there is evidence of some purchases from outside the CBGA in the latter part of the year, but these are as yet unconfirmed. The fact that the market was able to absorb a 185 tonne increase in central bank sales during a time of rising prices is testament to the strength of demand from fabrication and investment over much of the year.
In addition, the group believes that the smaller level of sales in the second half of the year (240 tonnes against 423 tonnes) was supportive of the price and certainly contributed to the rally of the last few months of the year.
Gross sales from non-CBGA countries in 2005 remained essentially flat, while gross purchases collapsed. Looking forward, GFMS expects gross non-CBGA sales to decline and gross purchases to increase as the “anti-gold” sentiment that has been pervading the sector in recent years appears to have moderated. This is a result of the weakening of the US dollar and a more aggressive US foreign policy that has made some developing nations wary of holding too much of their reserves in US instruments, along with the improved performance of both gold and alternative investments in general.
Gross sales are estimated at 677 tonnes with France the biggest seller at 144 tonnes through to November, followed by the Netherlands with 76 tonnes over the same period. Switzerland has now completed its sales programme, while Spain, Portugal, Belgium, Sweden, Germany and Austria were all sellers at a smaller scale. In addition the European Central Bank sold 47 tonnes of its own reserves. Outside the CBGA the largest declared sale came from the Philippines.
Gross purchases were substantially down during 2005 against 2004, reflecting the fact that Argentina had been a sizeable buyer in 2004 but not last year. Gross purchases were only 14 tonnes, coming in the main from Mongolia, Kazakhstan and Belarus, while other nations, largely in the developing sector, bought small amounts.
Official sector lending continued to decline and with lease rates remaining at unprofitably low levels there is an increasing tendency for central bankers to withdraw metal that they have on deposit and some have left the lending market altogether. As far as lease rates are concerned, this withdrawal of metal has been overpowered by increasing supplies of liquidity from investors’ long positions continued producer dehedging and rates, accordingly, remain low.
Net dehedging itself last year (the sixth consecutive year of dehedging) was much slower than in 2004, with the delta-adjusted hedge book contracting by 195 tonnes. This actually reflects a return to more sustainable levels after the extreme reductions of 2002 and 2004 in each year as a result of corporate activity with non-hedgers acquiring hedgers, along with corporate failure and the consequent forced unwinding of hedge books, plus some shifts in hedging policy, notably Barrick’s adoption of a zero-hedge policy.
Dehedging in 2005 was more or less equally weighted across the two halves of the year, with 92 tonnes in the first half and 102 tonnes in the second. The composition of the book was broadly unchanged at the end of the year with forwards and loans comprising 70% of total, vanilla options 27% and non-vanillas 3%. GFMS is not expecting the composition to change much in 2006 – subject to any major book restructuring by Barrick. The survey carries an assessment of Barrick’s bid for Placer Dome.
The top de-hedgers in 2005 were Placer and Newcrest, which accounted for 23% (33 tonnes) and 21% (30.2 tonnes) respectively, resulting largely from delivery into existing positions as they fell due. GFMS also estimates that there were roughly 20 tonnes of fresh hedging in the nine months to September from a small number of companies in a combination of project finance and price protection.
Finally on the physical supply side, GFMS reports that scrap supplies rose only slightly in 2005 despite higher prices in almost all currencies. The flow of scrap into the Indian market actually fell by 12% and this is thought largely to be due to the rapid adjustment of price expectations (there were frequent reports on-the-ground of purchases increase in as prices rose in the expectation of more increases to come). In addition, local scrap dealers reported that the average weight of metal being sold back fell markedly last year. In both East Asia and the Middle East the picture was mixed, resulting in a modest increase in scrap overall, although patterns changed over the course of the year. In Europe the overall return increased, but here the picture is skewed. Apart from a boost in metal returned by Italian fabricators selling unsold inventory, along with higher supplies from Italian pawnbrokers, scrap return declined.
GFMS thus reports a 461 tonnes increase in net supplies from the physical sector in 2005 against 2004. For the first half of 2006, supply calculated on the same basis (i.e. mine production net of hedging, scrap and net official sector sales) is expected to be lower than in the first half of 2005, largely as a result of reduced net official sector sales.
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