Thanks a loot, say investors
IT’S DOUBTFUL THAT the price of gold will this year scale the record level of US$850/oz achieved in January 1980. Yet British metals consultancy GFMS reckons the record average price for any year – which was $614,50/oz in 1980 – will be beaten in 2007.
That’s quite something, remembering of course the much-vaunted $850 record wasn’t either a London or New York fix but a fleeting intraday high. Gold traders’ screens were briefly lit up then dimmed – rapidly. The point is that the current gold price is pretty much as good as it’s ever been.
So there’s great general excitement that the gold market is stepping into territory never seen before, particularly because there’s fresh buying impetus for gold from a relatively new source – general fund managers.
In fact, they continue to pile into all metals and not just gold, says Philip Klapwijk, executive chairman at GFMS. “The value of combined non-commercial position in 13 commodities had at end-2006 reached only R994bn ($138bn) – far less than the market capitalisation of some blue chip equities,” Klapwijk wrote in a recent GFMS gold market update. The implication is that new buying is considerable but that there’s more to come.
However, gold’s comet-like ride comes at a price, some say. GFMS’s figures earlier this month showed that interest in gold from new sources had introduced volatility rare even for that market.
That volatility can be seen in GFMS’s recent gold demand figures for 2006: at 743 t, buys by investors represented a 13% decline in gold volumes. (There was an 18% increase to $14,4bn because gold per ounce was more expensive.)
Moreover, when new investors in gold push the price to record averages they’re stemming appetite among jewellers that have traditionally provided a floor to the gold price.
World jewellery demand fell 16% last year, with further declines expected this year, says GFMS. In first half 2006 there was a drop of 200 t alone in Indian gold buys. Remember that India is the world’s largest gold jewellery fabricator, absorbing 20% of all demand. By end-2006, the year- on-year decline in India was 90 t.
“If there’s no strong jewellery market there’s no way the gold price can sustain itself,” says Nick Goodwin, analyst at TSec in Johannesburg. He lays part of the “blame” at the door of exchange-traded funds (ETFs), which represent one means through which investors now buy gold.
“Jewellers also have heavy stocks of gold plus supplies from the scrap market, so they don’t need to come into the gold market for a while,” says Goodwin. The upshot is that a wobble in investor confidence could see heavy losses in the gold price.
The debate is a fairly moot one. David Davis, a gold analyst at Credit Suisse Standard Securities, says the jewellery market is in good shape and likely to receive a boost from China. “When China gets its regulatory issues out of the way you’ll see it become a new major source of gold demand.”
As for volatility, Davis reckons it’s always been a feature. “Most of the volatility is coming from political disturbances,” he says. But it’s the fundamental supply/ demand figures that underpin the market: less selling of gold by central banks, more de-hedging by gold producers, more buying of ETFs by ordinary investors.
The relationship between primary suppliers of gold – the mines – and the jewellery market has always been uneasy. Kelvin Williams, former marketing director at AngloGold Ashanti, speaking at the London Bullion Market Association’s biennial dinner in November 2006, said the disconnect between the jewellery market and gold producers is systemic. Said Williams: “Although 80% of annual gold consumption goes into gold jewellery, most gold mining companies have never met a jewellery manufacturer or retailer.”
Smarter than he looks? David Davis