Despite the modest correction in the gold price, the first half of 2005 is expected to see renewed interest in the precious metal. Gold is forecast to average $447 a troy ounce in the six-month period, United Kingdom-based consultancy GFMS said in a report released on Thursday.
However, GFMS said it isn’t expecting gold to break through the 1988 high of $483,90/oz during the first half of 2005.
GFMS said it sees investment demand as the prime driver of the expected renewed rally in gold, with the focus within this category continuing to shift to the longer-term, more fundamentally driven players.
“Their rationale for interest in gold was ascribed to such economic factors as ongoing dollar weakness, the United States fiscal and current account deficits and low real interest rates,” the GFMS report said.
“We only need a small shift in the allocation of institutional funds to bring about a quite hefty rally in the price,” GFMS analyst Bruce Alway stated.
GFMS is also forecasting that dips below $420/oz will be limited during the first half of 2005.
In 2004, GFMS estimates that global gold mine production fell by just more than 110 tonnes, or 4% — the biggest annual decline in gold production since the 1940s.
The decline was due to temporary factors, which hit such countries as Indonesia or Australia.
“Weak domestic gold prices, however, were more significant for South Africa. A recovery from these temporary matters is forecast to help lift global output in the first half of 2005 by almost 7%,” GFMS said.
“Currency effects, higher energy charges and lower output largely explained the 13% rise in January-September cash costs to almost $250/oz. South Africa saw some of the largest gains, though US and Australian costs also rose substantially,” the consultancy added.
During 2004, net official sector sales are estimated to have fallen by 19% to just less than 500 tonnes in 2004.
“This was largely due to low sales in the first three quarters by Central Bank Gold Agreement signatories, though there were significant purchases outside the agreement. Net sales are forecast at just under 250 tonnes in the first half of 2005, up nearly a quarter on the unusually low figure for the first half of 2004,” GFMS said.
Despite the 13% price rise, old gold scrap is estimated to have fallen by more than 12% to 829 tonnes.
“This apparent mismatch is chiefly explained by growing acceptance of prices over $400/oz and by currency stabilisation in Egypt. On the assumption that prices continue to be strong, scrap is forecast to rise by 4% in the first half of 2005,” GMS said.
Heavy liquidation during the first half of 2004 of longs built up in late 2003 generated implied net disinvestment of more than 110 tonnes in that period.
The second half, however, saw a fair recovery in interest, cutting full-year disinvestment to just more than 40 tonnes, though this was still in sharp contrast to 2003’s investment of more than 650 tonnes.
The first half of 2005 is expected to see a continuation to this recovery, with implied net investment reaching 175 tonnes.
Jewellery fabrication rose by 4% in 2004, in spite of the price rise, as a result of an acceleration in global gross domestic product growth and greater accustomisation to higher prices.
Much of the increase occurred in India, Turkey and China while significant losses were again seen for Italy.
“The global year-on-year comparison, though, is flattered by the absence of events as acute as 2003’s severe acute respiratory syndrome or the official Iraq war,” GFMS said.
“This and a further forecast price rise form much of the reasoning behind the forecast 6% fall for jewellery in the first half of 2005. Other fabrication saw a more buoyant 8% rise in 2004, largely thanks to strength in the electronics sector,” the consultancy added.
During 2004, net producer de-hedging is estimated to have seen a jump of 52% to comfortably more than 400 tonnes, primarily through delivery into existing positions, though buybacks were still significant.
De-hedging is forecast to retreat noticeably in the first half of 2005, largely as a result of higher prices and a shrinking number of hedged producers.
Bar hoarding rose by more than a third in 2004 to 245 tonnes, chiefly due to gains in east Asia.
“This plus higher coin fabrication (up 7%) meant world investment (the sum of bar hoarding, coin demand and implied net (dis)investment) stayed positive at 314 tonnes but was still heavily down on 2003’s figure of well over 900 tonnes,” GFMS said.
The second half of 2004 saw much higher world investment than the first, and a further recovery for all its components is forecast to continue into the first half of 2005. — I-Net Bridge