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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: goldsheet who wrote (93476)	2/8/2003 7:29:03 PM
From: goldsheet	Read Replies (3) \| Respond to of 116801

Gold Fields Mineral Services released its closely-watched year-end 2002 statistical compendium on January 16(th), featuring exactly the trends we expected: essentially flat mine production, higher recycled scrap flows, falling jewelry/fabrication demand, and rising investment demand. Mine production fell an incremental 2% to 2,543 tonnes in 2002 (81.8 million ounces; 1 metric tonne = 32,150.7 troy ounces). Given the "forest fire followed by drought" exploration history of the 1990s and the generally shopworn collection of development projects, we would expect mine production to remain essentially flat as economies of scale offset falling grades at mature mines and "fresh" projects proceed towards 2005-2006 startup. [my comment: reserves never disappeared so now they are quite viable at current gold price, and I still do not expect any serious decline in mine production this decade] Gold scrap flows responded to higher prices, rising 14% in 2002 to 778 T, or 23% of total supply. This was the highest since the Asian Crisis of 1998. We regard the rising price elasticity of secondary supply to be underappreciated. [my comment: I frequently have mentioned scrap as the biggest and highest grade gold mine on the planet, and it continues to have a significant impact - higher prices bring out more scrap.] The most significant physical dynamic in the gold market is the interplay between jewelry demand and investment demand. As gold prices rise, jewelry demand tends to fall, and investment to rise. Indeed, in 2002 jewelry demand fell 12% to 2,704 T, an eight-year low. At the same time, investment demand more than doubled to 417T (a mere $4.2 billion at average prices of $310.57). Herein lies the critical question. With jewelry amounting to 76% of total demand, and investment (coins, bar hoarding, and "implied") 12% -- will mainstream investors step up and buy the physical metal in sufficient quantity to generate and sustain the genuinely tight market conditions necessary for gold to trade higher over the long term? [my comment: Often have said that hugh increases in investment demand, even a doubling, have a difficult time offsetting a drop in jewelry demand - it's a big dog] The physical deficit in the gold market (a persistent feature) was filled by 549T of net central bank sales, partially offset by 352T of producer de-hedging. The latter has the effect of draining liquidity from the physical market and effectively transferring newly-mined gold back to central bank vaults. We expect producer de-hedging to slow over the next two years, and net central bank sales to remain in the 500T per year range. Renewed producer forward-selling is unlikely given low contangos, and the stark underperformance of gold equities perceived to be hedged-given fears of selling away earnings upside, and hidden balance sheet risks in a post-Enron market. [my comment: the gap continues to get filled and central banks will remain a significant feature in the market]