Thanks a loot, say in­vestors

Finweek English Edition - - Companies & markets - DAVID MCKAY

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

GOLD... CAN IT SCALE NEW HEIGHTS?

Source: I-Net Bridge

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