Commodities | Mar 01 2007
By Chris Shaw
While gold suffered along with most markets as a follow on the from the correction in Chinese stocks it has bounced back well, suggesting strong underlying fundamentals.
These fundamentals are supported by the latest December quarter gold Hedge Book analysis from GFMS, conducted by Societe Generale. The analysis of the December quarter figures shows a reduction in hedging levels, but also shows the recent drivers of the gold price remain in place.
Looking first at hedging, the report notes the global delta-adjusted hedge book feel by 1.12 million ounces in the December quarter to a level of 42.2 million ounces, the lowest level since 1994.
Gold heavyweight Barrack was a major contributor to this decline, the group reducing its hedge book following the takeover of Placer Dome. Most major producers also lowered their hedging positions, GFMS noting Australian producers such as Newcrest (NCM) and Lihir (LHG) took similar action by lowering their positions by 7% and 4% respectively.
On the group’s estimates, a mark-to-market valuation of global hedge books shows a total loss of more than US$10 billion, highlighting the growing gap between prices received by hedged and non-hedged producers. On the figures available the group notes hedged producers generated an average price in the period of US$525 per ounce, while non-hedged producers received an average of US$616 per ounce, much closer to the average spot price for the quarter of US$613.21 per ounce.
Turning to a review of the factors supporting the increase in the gold price, the group points to an increase in investment interest as one of the main drivers, particularly as the outlook for the US dollar weakened. It suggests the increase was also a reflection of a growing level of investor insecurity in terms of global economic and geopolitical outlooks.
While demand was strengthening supply wasn’t, the report pointing out official sector sales were down more than 10% from September quarter levels at 1.29 million ounces. The lower sales were met by increased buying interest, much coming from countries such as Russia that are outside the Central Bank Gold Agreement. France and the European Central Bank were among the larger sellers in the December quarter, while as mentioned Russia was a major buyer, reflecting its stated desire to increase the spread of its reserve assets.
Fabrication demand was also solid in the period, the group noting off-take was up 5% in quarter-on-quarter terms at the same time as global scrap volumes fell. As Usual, India emerged as a major buyer in the fabrication market.
The lower sales from central banks were not offset by higher mine production, as GFMS notes year-on-year production fell 5% to 20.61 million ounces, a decline in production at Grasberg being a major contributor to the fall.
The group doesn’t make any forecasts for the gold price outlook, but with the China market correction increasing uncertainty at least in the short-term and the fundamentals implying a positive outlook, it appears the gold bugs may be right and the price of the metal may yet push higher.