CPM Group Forecasts Drop in Gold Demand, Rise in Supply
By Jon A. Nones
15 Mar 2007 at 06:33 PM GMT-04:00
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- Last year, gold investment demand fell by 7%, accompanied by a 3% shortfall in gold supply, with average prices 35.9% higher than in 2005. This year, CPM Group is predicting demand to fall by another 9% and supply to rise by 4.4%, with gold prices up only 1% from the start of the year thus far.
In its latest “Gold Yearbook,” New-York-based commodities consultancy CPM Group said investors are projected to add 39.7 million ounces of gold in 2007 on a net worldwide basis, 9% less than last year’s 43.5 million ounces and 15% less than 46.7 million ounces in 2005.
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“The rush of investors into gold remains the single most important factor in determining the price of gold,” said CPM Group.
According to the consultancy, the amount of gold investors buy is directly correlated to how worried they are about the economic, financial and political landscape. The report suggests that “investors may be less worried this year than they have been over the past two years.”
Last year, gold prices peaked at $721.50 on 11 May 2006, as waves of investors poured money into ETFs, gold bullion, coins, jewellery and other investment products. At the time, oil was trading close to $75/lb and world-wide geopolitical concerns were heating up.
CPM Group said one or two major political crisis in any number of current trouble-spots, a major interruption in international petroleum flows or some other global crisis could drive investors to buy even more gold this year than they did in 2006.
“More investors are spending more money on gold investments for a longer period of time than ever before in history, fuelled by political, economic and financial concerns,” the report noted.
Since 2001, the consultancy estimates that investors have increased their gold holdings by 241.5 million ounces, nearly a quarter of the 1044.9 million ounces that investors are estimated to own collectively around the world.
“The amount of gold that may be purchased may decline from 2006 levels during 2007, but the overall pace of investment demand is expected to remain very high by historical standards,” said CPM Group.
Source: CPM Group
Jeffrey Christian, head of CPM Group, told RI he didn’t believe the rise in mine production, nor the fall in investment demand in 2007 would have a substantial effect on the price.
He said “the gold price will remain high for a while” as investors digest deteriorating geopolitical and economic stability worldwide.
“The gold price is extremely vulnerable to change right now,” he said.
In 2006, investors bought 7,912,354 ounces of gold backed by ETF shares, representing 18.9% of total investor demand for physical gold. According to the report, gold ETFs held a total of 20,252,673 ounces of gold by the end of 2006, with most of this added over the course of 2005 and 2006.
On the supply side, the total flow of newly refined gold entering the market declined 3% to 105.7 million ounces in 2006 from 108.9 million ounces in 2005. This reflected a 6% decline in secondary supply to around 26.3 million ounces and a 2.4% drop in mine production to 61.4 million ounces.
However, total gold supply this year is projected to rise 4.4% to 110.3 million ounces, with mine production to increase by 4% to 63.8 million ounces. CPM said the total gold supply of newly refined gold in 2007 would be the second largest annual supply ever.
CPM Group also noted that enormous volumes of gold have flowed into major market centres, including London, Dubai, and Canada, and have not flowed out.
The consultancy said this partly reflects a bullish trend, as more financial institutions are storing gold, but reflects a bearish trend as well.
“There is a large amount of gold flowing into markets centres that is not being sold and moved on to jewellers and others in other parts of the world,” said CPM Group.
Jon Nadler, analyst for Kitco.com, said that at least some of these ounces are “inventories of bullion dealers who do not yet have customers ready and willing to purchase them.”
Lastly, CPM Group noted that central banks sales last year were about half of that of 2005 at 11.4 million ounces of gold, down from 20.6 million ounces. This year, central bank sales may decline even further, and could total no more than 9 million ounces, the report said.
“Try as one might to play up the 'shortfall' in supply, the year-on-year decline in investment demand is more relevant, and needs to be appreciated by starry-eyed pundits,” said Nadler.
Nadler urged investors not to forget that the investment component in gold's market is the largest such impact factor for any commodity, and potential resistance to very high prices could not only affect jewellery demand, but also demand from individual investors.
“It is all good to be bullish, it is also okay to be wrong occasionally, but, let us all be realists as well, and most importantly, reporters of facts not advertorials. Investors tend to appreciate that. No, make that, they demand it,” said Nadler.
Gold Price Outlook
The average price of gold was $606.67 in 2006, up 35.9% from 2005’s average. It was the second highest annual average gold price on record, surpassed only by the $611.98 average price in 1980.
The price this year has averaged $650.38 thus far, closing today up $4.60 at $647.10.
If it were maintained through the year, the annual average price of gold would be at a record level in 2007.
Christian forecasts the average price of 2006 to be $645/oz, an increase from CPM Group’s $620/oz three months ago.
Nadler forecasts the average price to be in a range from $675 to $690: “A decent gain over 2006, but no longer the 25%+ pace it had recorded.”
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