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Gold price to average $1 225/oz in 2014 – GFMS

Gold price to average $1 225/oz in 2014 – GFMS

Photo by Bloomberg

17th April 2014

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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JOHANNESBURG (miningweekly.com) – Weighing up the factors impacting the gold market this year, 2014 looks set to be a second year of price decline for gold, with precious metals consultancy Thomson Reuters GFMS continuing to forecast an average of $1 225/oz for the year.

The organisation’s Gold Survey 2014 found gold’s core price drivers little changed since the beginning of the global financial crisis, noting that there was consensus that the gold price would continue to decline over the coming months and years.

A continued economic recovery that would see the tapering of the US Federal Reserve’s (Fed’s) “massive” quantitative easing (QE) programme, increases in US treasury yields and equity markets, and a stronger dollar – all of which were negative for gold – were expected to dampen the appetite for gold as an asset class.

This had seen some forecasters predicting that, based on recent correlations, gold would fall below the $1 000/oz level for a sustained period.

“Gold rarely sticks to the script for long; however, our base case view is that, as Western investor support continues to fall away from gold, physical buying will see prices supported,” the report noted.

It added that 2013 had revealed “major” increases in investment-grade jewellery demand, coin and bar purchases around the $1 200/oz level.

“What remains to be seen is whether this was a once-off surge of pent-up demand and pipeline stock build in China, or if these levels of demand, which led to temporary physical shortages of gold, are sustainable,” Thomson Reuters GFMS noted.

Assuming physical demand supported prices, the group expected a trading range in the $1 100/oz to $1 400/oz region dropping from the 2013 yearly average of $1 411/oz.

This came as the first quarter of the year demonstrated a drop off in physical demand above $1 300/oz, although this was somewhat distorted by the weakening of several emerging market currencies in early 2014 and by Indian import restrictions.

The market was yet to adjust to physical demand as a key driver, which could still lead the yellow metal to overshoot on the downside.

“Indeed, a substantial shock to the world market would be needed to see gold return to the price levels of 2011 and 2012. This would either imply a substantial flight to gold as a safe-haven asset or the undermining of confidence to the dollar,” the report noted.

2013 GOLD SUPPLY

Reviewing the movement of the gold market in 2013, Thomson Reuters GFMS found that global mine production posted strong growth in 2013, increasing by almost 6% year-on-year to an all-time high of 3 022 t.

Eight countries posted gains over 10 t, with increases in China, Canada and the Dominican Republic each greater than 20 t last year.

Major additions from projects entering production or ramping up included Pueblo Viejo, in the Dominican Republic, Blissa-Zandkom, in Burkina Faso, Martabe, in Indonesia, Detour Lake, in Canada, and Tucano-Martabe, in Brazil, adding more than 5 t apiece.

“The outcome of such [a] robust gain may seem surprising in the face of the sharp falls in the gold price over the year. However, the delivery of the projects in [the] commissioning phase has progressed.

“It has been a common theme for producers, where flexibility has allowed, to increase throughput rates, [improve the efficiency of] processing plants in pursuit of [better] recovery rates and increase processed grades in an attempt to reduce costs, with only a small number of assets marked for closure,” stated the report.

This strategy by producers to counter escalating costs and preserve margins amid a lower pricing environment led to global average total cash costs remaining essentially flat in 2013 at $767/oz.

Scrap supply in 2013 declined for the fourth year in succession, slumping 22% year-on-year to an estimated 1 280 t, a level last seen in 2007.

According to the report, last year’s 15% drop in the average yearly dollar price was the chief architect for the fall, with all major regions registering “sizeable” declines.

2013 GOLD DEMAND

The total physical demand for gold rose by 15% in 2013, as high jewellery offtake and retail investment countered a drop in industrial demand and was bolstered by net official sector buying.

Jewellery demand grew by a notable 18% in 2013, to a six-year high of 2 361 t, boosted by the lower gold price environment.

Industrial fabrication fell by a modest 2% owing to continued thrifting in the electronics sector, while physical bar investment jumped by 33% to a fresh record of 1 377 t, driven by a surge in demand in key Asian markets, in particular China and India.

Excluding scrap, full-year global demand for gold increased by 34%, reflecting a surge in demand and a notable fall in scrap supply.

“This outcome should not come as a great surprise, given the significant drop in the average gold price, which boosted demand for jewellery in many key consumer markets,” the report noted.

Meanwhile, investment demand remained weak in 2013, with total identifiable investment, which included physical bar investment, all coins and an exchange-traded funds (ETFs) inventory build, falling by 45% to just below 900 t – its lowest level in six years.

The 29% drop in the gold price on an intra-year basis led to an even more material decline in investment demand in value terms, from $88-billion in 2012 to $41-billion last year.

Key to this lacklustre investment demand was investors’ increasingly bearish sentiment towards gold, following weak price performance in late 2012 and growing expectations of the Fed’s QE tapering.

Last year marked the first year of negative outflows of ETFs since the launch of the first major ETF in 2003, while official sector purchases fell by 25% in 2013.

However, at 409 t, this still represented an elevated level compared with historic norms and was largely unaffected by the price slump.

“Underpinning much of the central bank buying is a continued desire to diversify emerging economies’ growing foreign exchange reserves,” noted the report.

Producer dehedging amounted to 48 t last year, a reduction to the outstanding hedge book of some 39% year-on-year.

Despite the “dramatic” falls in the gold price in 2013, the report found that few companies moved to hedge production, with investors remaining opposed to primary gold producers hedging production.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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