Gold has benefited from dollar strength and investor and speculator buying due to fears of stagflation and the impact of the credit crunch. We forecast that gold will fall over the next two years to levels better supported by jewellery demand.
We forecast that gold will average $851/oz in 2008, higher than our previous forecast due to the better than expected Q1-08 outcome. Our forecast of $750/oz for 2009 is unchanged.
The consensus forecast is for gold to average $862.30/oz according to the LBMA forecast 2008 publication.
Performance
Speculative and investment buying resulted in gold trading sharply higher in January and February, breaking the previous all-time high of $850/oz in the first real trading day of 2008 and then going on to set records, culminating in a new all-time high of $1030/oz.
But gold could not hold onto these lofty levels and slipped back to trade down to $874/oz. After a bounce to just above $950/oz in
April, the metal has succumbed to more widespread profit taking and is trading around $880/oz at the time of writing.
In the absence of the unusually strong safe-haven buying of gold we believe gold would be trading near $700/oz and the metal is vulnerable to a further correction.
Demand environment
The first three months of 2008 saw very poor jewellery demand as gold moved sharply higher with our sales desks report jewellery demand of 5-15% of the levels we consider strong. The sell-off in gold in late March has seen some recovery but demand remains much lighter than normal for the time of the year and this leaves the metal vulnerable to further profit taking.
ETF investors bought only 2.0 million ounces of gold in the first quarter of 2008, disappointing considering the very strong performance of gold. Net redemptions have occurred since then and as at 24 April, total ETF positions stood only 600koz higher than on December 31st with 1.6moz of redemptions between 22 and 24 April.
US futures market gold investors held large spec long positions through the first ten weeks of 2008 before liquidating some of their holdings in late March and April.
Supply environment
GFMS report that gold production fell by 0.4% in 2007 to 2,476t as mining companies struggle to maintain existing production and are failing to find new mines to expand. We expect gold supply will remain under pressure in 2008, not least because of the power and other production problems faced by the South African mining industry, discussed in more detail in the introduction to the precious metals section.
Our refinery contacts and physical sales desks in Switzerland report a surge in the sale of scrap gold coming back to the market with the gold price at such elevated levels. This is reducing the jewellery industry¡¯s net demand for gold.
Gold mining de-hedging continued at a rapid pace in 2007 according to GFMS, which estimates the net hedgebook declined by a record 446t. The remnant of the global hedgebook is now small to GFMS and increasingly concentrated in a only a few mining companies. We expect the rate of producer de-hedging to slow in 2008, but we have said that every year for the past few years and have been surprised by aggressive buy-backs each year.
Central banks remain net sellers of gold, disposing of a total of 481t in 2007, more than the 370t sold in 2006. The vast majority of the sales in both years came from the signatories of the Central Bank Gold Agreement (CBGA) with Spain and Switzerland the most interesting sellers. Spanish sales increased sharply in 2007 while Switzerland, a large seller under the first CBGA, restarted sales due to the high gold price, which had increased gold¡¯s proportion of its total reserves.
Some small central bank buying was noted in 2007 including Qatar and Russia, although most large central banks that have small gold holdings remained sidelined.
News-flow to watch for
The quarterly results of the gold miners with hedgebooks ¨C including AngloGoldAshanti, Barrick and Newcrest ¨C for signs of further de-hedging.
Weekly COTR data from the CFTC and daily open interest figures from
TOCOM are useful measures of visible speculative positioning.
Quarterly supply and demand reports from the World Gold Council.
We forecast that gold will average $851/oz in 2008, higher than our previous forecast due to the better than expected Q1-08 outcome. Our forecast of $750/oz for 2009 is unchanged.
The consensus forecast is for gold to average $862.30/oz according to the LBMA forecast 2008 publication.
Performance
Speculative and investment buying resulted in gold trading sharply higher in January and February, breaking the previous all-time high of $850/oz in the first real trading day of 2008 and then going on to set records, culminating in a new all-time high of $1030/oz.
But gold could not hold onto these lofty levels and slipped back to trade down to $874/oz. After a bounce to just above $950/oz in
April, the metal has succumbed to more widespread profit taking and is trading around $880/oz at the time of writing.
In the absence of the unusually strong safe-haven buying of gold we believe gold would be trading near $700/oz and the metal is vulnerable to a further correction.
Demand environment
The first three months of 2008 saw very poor jewellery demand as gold moved sharply higher with our sales desks report jewellery demand of 5-15% of the levels we consider strong. The sell-off in gold in late March has seen some recovery but demand remains much lighter than normal for the time of the year and this leaves the metal vulnerable to further profit taking.
ETF investors bought only 2.0 million ounces of gold in the first quarter of 2008, disappointing considering the very strong performance of gold. Net redemptions have occurred since then and as at 24 April, total ETF positions stood only 600koz higher than on December 31st with 1.6moz of redemptions between 22 and 24 April.
US futures market gold investors held large spec long positions through the first ten weeks of 2008 before liquidating some of their holdings in late March and April.
Supply environment
GFMS report that gold production fell by 0.4% in 2007 to 2,476t as mining companies struggle to maintain existing production and are failing to find new mines to expand. We expect gold supply will remain under pressure in 2008, not least because of the power and other production problems faced by the South African mining industry, discussed in more detail in the introduction to the precious metals section.
Our refinery contacts and physical sales desks in Switzerland report a surge in the sale of scrap gold coming back to the market with the gold price at such elevated levels. This is reducing the jewellery industry¡¯s net demand for gold.
Gold mining de-hedging continued at a rapid pace in 2007 according to GFMS, which estimates the net hedgebook declined by a record 446t. The remnant of the global hedgebook is now small to GFMS and increasingly concentrated in a only a few mining companies. We expect the rate of producer de-hedging to slow in 2008, but we have said that every year for the past few years and have been surprised by aggressive buy-backs each year.
Central banks remain net sellers of gold, disposing of a total of 481t in 2007, more than the 370t sold in 2006. The vast majority of the sales in both years came from the signatories of the Central Bank Gold Agreement (CBGA) with Spain and Switzerland the most interesting sellers. Spanish sales increased sharply in 2007 while Switzerland, a large seller under the first CBGA, restarted sales due to the high gold price, which had increased gold¡¯s proportion of its total reserves.
Some small central bank buying was noted in 2007 including Qatar and Russia, although most large central banks that have small gold holdings remained sidelined.
News-flow to watch for
The quarterly results of the gold miners with hedgebooks ¨C including AngloGoldAshanti, Barrick and Newcrest ¨C for signs of further de-hedging.
Weekly COTR data from the CFTC and daily open interest figures from
TOCOM are useful measures of visible speculative positioning.
Quarterly supply and demand reports from the World Gold Council.
