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To: coug who wrote (630)	1/20/2006 3:15:12 PM
From: coug	Read Replies (1) \| Respond to of 3961

Is Gold Topping Out? By Lindsay Williams 20 Jan 2006 at 08:35 AM EST JOHANNESBURG (Business Day) -- Is the volatility in the gold price a sign that the market is topping out? Classic Business Day gets Neil Meader, senior analyst at GFMS, on the line from London about their outlook. LINDSAY WILLIAMS: The last 25 tonnes of gold the Bank of England sold was at $252 dollars an ounce five or six years ago. In the last few days the gold price seen a high of $564.40, a low of $539.50, and is currently $552.50. Some people are saying the volatility of the last few days is indicative of the top of the market, another indication that it might be topping is the fact that Anglo American plc [Nasdaq:AAUK; LSE:AAL] might be selling their full stake in AngloGold Ashanti [NYSE:AU]. With the headlines out of GFMS today maybe it is the top of the market: “Official gold sales were at an all time high in 2005. Gold output was up 1% in 2005. Jewellery demand slid in the second half of 2005. On the other hand investment demand is driving gold to new highs - so everything is fine.” Neil, looking at the headlines I don’t know what to make of it! I like the last bit - where it says that investment demand is driving gold to new highs - but on the other hand we’ve got AngloGold Ashanti maybe being sold by Anglo American. They’re saying that maybe they don’t want that particular asset any more, and the other one that’s quite important to me is gold de-hedging declined by 50% in 2005 - does that imply that gold mines are saying: “This is enough - we’re going to start re-establishing our hedge positions again”? NEIL MEADER: No, not at all. I think the first point that needs making is that even if we have a slight retreat from current levels, the period average - whether we’re looking at the first quarter, the first half, or even the whole of 2006 - however you measure it, it’s still going to be up on anything that we saw in 2005. I think having seen such a dramatic rally in the price in the closing months of last year, that some kind of a pause is quite expected - it’s nothing really for people to get too nervous about. We have specifically said that there is still scope for further price gains later in the year - probably in the first half - and possibly for 2007 as well. So I don’t think people should necessarily take fright in any capacity at a forecast for the first half of the year that gives a price average somewhat under current levels. Returning to one specific point that you had made about the de-hedging - you’d mentioned that that had shown a dramatic fall last year - I think you’re better off regarding that as a return to normal. We did see something of exceptional conditions in 2004 - looking forward for 2006 I think we will see de-hedging pretty much carry on at around the 100 tonne per half-year level, and there’s really no evidence of any shift in producers’ attitudes in favour of hedging. LINDSAY WILLIAMS: What about the demand side? Jewellery demand slid in the second half - is it becoming more price sensitive now? NEIL MEADER: I wouldn’t say it is becoming more price sensitive - certainly the fall that we saw in the second half, and the slump that we’ve predicted for the first half of 2006 is going to be primarily price driven. That’s because of the dependency of the market overall on what is happening in India. I think you’d be hard pushed to say that there’s any pronounced change in the elasticity of jewellery demand overall. LINDSAY WILLIAMS: Looking at the output side - global gold output was up 1% in 2005 to 2,494 tonnes. I suppose as the price goes up, more and more deposits become viable - do you see that trend continuing? NEIL MEADER: Very much so, yes. For the first half of 2006 we’ve forecast a 5% increase in the price, and we are expecting over the next couple of years to see a significant phase of growth. There are a handful of new projects ramping up to full capacity, a couple of others coming on stream - most of these tend to be in Australia, some in Latin America, some in North America even - so yes, I think over the next couple of years it’s quite fair to say that a modest increase in gold production can be pencilled in. LINDSAY WILLIAMS: On the other hand investment demand is going to mop it all up, and also create shortages - if there’s ever such a thing as a shortage in gold! Your headline is: “Investment demand to drive gold to new highs.” You say $521 an ounce is going to be the average in the first half of 2006 - I spoke to TheBullionDesk.com about a week ago, and they say $618 is an average for the whole of 2006, with a spike up to $760. Obviously, that’s fanciful stuff, but you’re also predicting rises. NEIL MEADER: We are indeed, yes. I think our expectations are that the fireworks will happen later, certainly in the second half - possibly even into 2007 - but there’s still very much the possibility gold will move higher. I think one of the most important things to remember is that the percentage of funds allocated to gold - even by so-called alternative investors - is tiny. You don’t really need to have that large a percentage shift in their allocations for the amount being invested in gold to have really quite a dramatic effect. To a degree that’s really going to depend on a trigger happening for investment really to kick off - whether that’s a pronounced weakness in the dollar coming through, a worsening tension in the Middle East, any signs of inflation galloping out of control - that sort of thing is going to be needed really to get a fresh and sustained wave of investment coming through. LINDSAY WILLIAMS: What about the Chinese? Do you think that there’s any chance that the rumours that we’ve been hearing for so many months - even years now - that the Chinese are going to diversify their foreign exchange reserves to include gold? Do you think that may be the next leg up for the yellow metal? NEIL MEADER: I would be surprised if we see China entering on the buy side - we’ve heard comments that they perceive gold to be too illiquid for their purposes. Bear in mind that the scale of their dollar reserves, and the scale of the total gold market would make it quite difficult for them to park any meaningful volume of their dollar reserves into gold, but I certainly think central bank purchases can’t be ruled out in the first half of this year. We’ve heard rumours of other countries elsewhere in the world looking to buy - they may in fact have already done so - and there are clearly advantages for certain countries in holding assets that aren’t U.S. dollars. resourceinvestor.com