Gold searching for support

London-based Gold Fields Mineral Services (GFMS) predicts gold prices will continue rallying during the first half of 2004, perhaps surpassing US$450 per oz. before the end of June. The consulting firm did not rule out the possibility of a correction but expects the gold price to average US$437 per oz. between Jan. 1 and June 30.

Over the coming months, the gold market will become increasingly dependent on investment to sustain prices, and producer de-hedging could increase in comparision with the relatively quiet levels seen last year. These projections are a reflection of higher gold prices and restructured producer hedge books.

GFMS Managing Director Philip Klapwijk had previously stressed the importance of investment, both to the year just ended and the coming months, noting that last year “saw a lot of hot money flow into gold, mainly as speculators saw some good opportunities with a war in Iraq and a dollar heading south.”

He adds: “But what may be more interesting this year is whether gold can generate stronger interest from longer-term players with larger sums to invest. Alternative investments certainly remain in vogue, and we think gold will pick up.”

GFMS saw little support for prices from jewelry fabrication demand. Not only was it estimated to have fallen in 2003; it is forecast to drop by about 10% in the first half of 2004. The jewelry sector had a grim 2003 because of higher prices, the Iraq war, and the impact of SARS.

The remaining components of gold’s supply-and-demand fundamentals had a less significant effect on last year’s rally, though the modest rise in official-sector sales and larger increase in scrap did restrain the price move. However, in the first half of 2004, the effect of these two developments was seen as more positive, with central bank sales forecast to fall and scrap not expected to rise.

Gold production in Australia was 20 tonnes higher, year over year — the first increase there in five years. Production in Peru was up 8%, part of which was attributable to higher output at the giant Yanacocha mine; meanwhile in China, output increased for the tenth straight year to reach an estimated 210 tonnes. Indonesian output was also higher at 164 tonnes, despite operational difficulties at Grasberg.

In North America, gold production dropped by 20 tonnes, owing to lower grades and mine closures in Canada and the U.S. In South Africa, production dropped another 15 tonnes, reflecting an increase in the rand against the U.S. dollar. Nine-month cash costs in South Africa were US$100 per oz. higher than in the corresponding period of 2002. Currency strength was also an issue in Australia and Canada, where 9-month cash costs were US$38 and US$26 per oz. higher, respectively, than in the August-to-September period of 2002.

— The preceding is from an information bulletin published by London-based Gold Fields Minerals Services.