Virtual Metals Group

Media/Press

Central bank gold sales to fall: The Yellow Book

5 March 2009, LONDON, (Commodity Online)

Global gold supply will continue to be impacted by lower mine supply although expected falls in South African, Australian and Canadian production will to some extent be offset by increased output from Peru, Russia and China, says a report from The Yellow Book, the VM Group’s biannual survey on the world gold market.

The report has predicted that the long-term situation with mining in South Africa, the world’s largest gold producing country, is bleak. Even taking into account the power supply problems early in 2008 in South Africa, production was poor.

”The difficulty lies with the increasing depths that have to be reached and the geological complexity of South Africa’s gold deposits, which make exploitation and extraction a very difficult and expensive task.

When combined with the current lack of credit, the report forecasts another decline in South African output in 2009, and this alone will offset gains in China, Russia and Peru.

Coupled with a ~20t fall in Australian output and 7t fall in Canadian output, the report estimates that gold mine supply will fall by 1.3% year-on-year, to 2,295t (73.7 Moz) in 2009.

The risk to the upside is in higher prices, which will encourage greater mining.

While hedging is expected to fall to just 16t, from 33t in 2008 (the report is assuming no return to price protection hedging), scrap supply will more than fill the void, increasing by 13%, to 1,261t (40.5 Moz) thanks to a stronger gold price.

Central bank gold sales will fall again this year, although it is worth noting that the vast majority of sales come from signatories to the Central Bank Gold Agreement (CBGA), and this ends on the 26th September 2009.

”We are expecting sales of just 150t (4.8 Moz) for this, the bulk of which is in the final year of the current CGBA round (which runs September 27th to September 26th), unless any new sellers emerge; even if they do, total sales are likely to be less than 200t (6.4 Moz),” says the report.

After that, it said it is impossible to predict whether a new agreement will be implemented or if sales outside the pact might resume, which would be the first time since 1999.

Given that Germany and Italy have not made any major disposals for many years, and that the wrangling between German politicians and the Bundesbank over whether or not to sell gold to help fund a $50bn stimulus package is as yet unresolved, we cannot rule out the agreement not being renewed.

However if either Germany or Italy do opt to sell gold, or the IMF still wants to sell .we are likely to see another renewal of the Agreement. An announcement is likely to be made in March.

Either way it is unlikely to result in a surge of Central Bank gold sales taking place between October to December 2009, thus our calendar year total is a similarly low 128t (4.1 Moz).

On the demand side, the report says adornment jewellery demand will rise slightly, but it expects sharp falls in the face of any sustained gold rally. The stellar performance on the demand side will come from ETF demand, which we estimate will add another 400t by year-end, but this may be too conservative given that ETF holdings grew by more than 260t (8.3 Moz) in January and the first half of February 2009 alone.

In a sense, though, ETF demand is another swing factor.

Taken together, although total gold supply is expected to weaken slightly this year to 3,770t (121 Moz), a fall in demand will see the market surplus widening from 60t (1.9 Moz) to 284t (9.1 Moz). Although the largest surplus for a number of years, it is relatively modest given the potential for investment demand outside of the ETFs and coins to absorb this metal.

This does emphasise, however, how it is investment demand that is driving this market and necessarily given the decline in support from dehedging and price-hit jewellery sales.

In 2008 gold demonstrated why it is widely considered to be a safe haven, albeit one that at times was battered by the remarkable sequence of economic events.

When it closed at $869.75/oz on 30th December 2008, it was the only metal to have gained, up almost 4%. During more normal times this would be nothing to shout about; but given that all other metals collapsed it was an impressive performance.

While gold might come down from its current heights in H1 2009, unprecedented deficit-funded government spending and the spectre of quantitative easing are likely to be very supportive of gold later in 2009, with investors, currently ignoring inflationary risks for the safety of government bonds, feeling increasingly uneasy about the inflationary consequences of the prevalent devil-take-tomorrow attitude being seized upon by governments in dealing with this recession.

There are of course alternative scenarios that are not so good for gold. An economic recovery, especially one that begins in the US, might see the dollar rally, particularly against the euro, as the EU economies entered this downturn later than the US. This would knock the dollar gold price.

The perfect scenario for a sustained higher gold price would be one in which sluggish economies require ever more government intervention, but where economic recovery kicks in before policymakers realise, and hence rapid inflation ensues. This would imply a strong second-half rally; the mere possibility of this should keep gold well supported.

VM Group in the News

2010

2009

2008

2007

2006

2005

© 2009 Virtual Metals. All Rights Reserved. Logos by Shen Schubert

CONTACT US: info@virtualmetals.co.uk