Whither gold? Differing viewpoints on gold supply.
(I hope this passes everyones 'whose benefiting test')
By: Charles Carlisle
Posted: '28-OCT-06 15:00' GMT © Mineweb 1997-2006
LONDON (Mineweb.com) --Last week we had Ian Cockerill, CEO of Gold Fields talking of a 1 to 1.5 percent decline in mined World Gold output, while other experts predict perhaps a relatively small to medium increase in mine production. Who is right remains to be seen, although with gold, and the gold price, whether mined output rises or falls by these percentages, while not being irrelevant may also not be the defining factor as to the ups and downs of the metal price itself.
While my own views on mine supply in 2007 tend towards the Cockerill prediction, there are so many other factors to take into account in the supply and demand picture that such analyses have to involve a wide degree of assumption or supposition rather than a clearly defined mathematical calculation. In theory it is possible to make a calculation of mine supply based on knowledge of existing mining company plans and proposed new developments. The ultimate accuracy of such a prediction will obviously depend on unknown, and perhaps unpredictable factors, such as future labour strife, equipment breakdowns and shortages, government interference etc. But overall a fairly accurate picture can be prepared in advance.
But mine output is not the only major factor affecting overall supplies – and, arguably, demand is even more unpredictable. On the supply side such factors as scrap supply, Central Bank sales and hedging by mining companies all play an extremely important part, and the levels of all of these can be extremely variable and highly unpredictable.
Likewise on the demand side, the biggest area by far is jewellery offtake and this again can be extremely variable and unpredictable as has been seen in recent months with firstly the high prices seen towards the end of the first half of the year apparently putting a damper on the jewellery sector purchases, but recent reports suggest that this has now come back strongly. Purchases, if any, by some Central Banks can take many tons off the market, while investment demand, whether by purchases of physical gold or through the ETF route, are also impossible to predict. A specific viewpoint needs to be taken and it will tend to be the analyst’s overall gut feeling which predominates. Industrial and dentistry demand is a little more assessable though, as perhaps is dehedging by mining companies as this does tend to follow pre-ordained statements by the companies which have big hedge positions.
So, if all these factors are taken into account, an analyst will predict the supply demand balance for the next year – and into the future if they are really brave. But with so many strong variables to take into account the overall prediction will probably just be down to the perhaps unconscious prejudices of the analyst concerned!
It may also be arguable as to whether any of these supply and demand figures, whether accurate or not, have any impact at all on the gold price. As has been seen over the years, the key driving force for the gold price has been the strength or weakness of the US dollar. The recent gold price run has, perhaps, largely been because of dollar weakness, and the perception that the greenback is going to remain weak in the foreseeable future. The gold price has also, in recent weeks, tended to follow the oil price up and down, although whether there should be any connection between the two, apart perhaps in terms of political uncertainty over oil supplies, and the causes of this uncertainty, appears to be obscure.
What of the gold price in the past week? Well its behaved almost identically to the week before. At the end of this week again the price is bumping up against the $600 an ounce mark, after falling back sharply at the beginning of the period. There seems an unwillingness for the price to break out either upwards or downwards from its recent pattern of ranging between $590 and $600, but my view is that an upside breakout is more likely than a downside one, but when that may occur is a little more uncertain. Gold fundamentals are probably good in terms of supply and demand, but there are so many largely unpredictable factors that can affect the supply demand balance that, as noted above, the general outlook can change quickly!
Where do we go from here. I continue to think positively in this respect with gold perhaps breaking out into the low to mid $600s by the year-end or shortly after, but then I wouldn’t put my shirt on it! |
