Standard Chartered Bank, the world’s biggest emerging-market bank with more than 60 000 employees in 56 countries, including South Africa, says gold’s recent rally is set to continue.
Helen Henton, head of commodity research at Standard Chartered Bank, says that framed in the context of current dollar weakness, the gold rally looks set to continue heading higher.
“The gold-dollar inverse correlation is expected to hold firm through the course of 2007. The dollar outlook, according to our FX strategists, is for a plateauing in Q2 followed by a slight strengthening in H2 2007 as the Fed begins to cut interest rates.
“Gold fundamentals were boosted in 2006 by the near-50% reduction in central-bank gold sales, and a notable improvement in demand from Q4 as price volatility fell sharply. As 2007 unfolds, the rally in gold prices should remain strong. The extent to which demand can offset dollar strengthening in H2 will be a key test of strength.”
Henton notes that the latest World Gold Council (WGC) review of demand trends confirms a strong recovery in Q4 2006.
“Jewellery demand, by far the dominant end use, rose 2% year-on-year in Q4 versus a near 16% year-on-year decline for the year as whole. The WGC attributed much lower price volatility as the main cause of the improvement. The other area of strong growth has been inflows into exchange traded funds [ETFs].
“In 2006, these investments rose by 27% year-on-year to 265 tonnes. With imminent launches from India and interest from Japan, the ETF growth story is set to continue. Moreover, fund interest in gold is on the rise.”
Henton says the latest Commodity Futures Trading Commission data on non-commercial positions suggest net longs at 129 933 lots are at the highest level since May 2006. “The fund position has effectively doubled since October.”
She points out that the most significant change for the gold market has come from the tightening of supply.
“In 2006 gold supply is estimated to have fallen by around 13% year-on-year to around 3 450 tonnes. The biggest contributors to this decline include the 50% decline in net gold sales by central banks to 320 tonnes. In fact certain central banks have been buying gold as a diversification trade out of dollar reserve holdings.”
The above needs to be considered in conjunction with the fact that producers are continuing with dehedging programmes, which lowered supply by 400 tonnes in 2006. At the same time, they are hedging less new production.
“The size of the hedge book is shrinking: at the end of last year it stood at 1 288 tonnes. Gold lease rates have hit rock bottom, reflecting the lack of hedging activity, and even given current attractive forward rates, forward selling is still conspicuous by its absence.”
Technically gold continues to looks attractive to speculators; prices are clearly in an upward channel, and looking to test the $700-an-ounce level.