Commodities | May 02 2007
By Greg Peel
Analysts at Natixis Commodity Markets (formerly known as Natexis) suggest the backdrop to the precious metals sector remains favourable, fuelled by US dollar weakness, ongoing geopolitical tensions and the potential for higher energy prices leading to renewed inflation fears.
A noticeable factor in the gold market in recent years has been the upward drift of the “floor” price, says Natixis. A “floor” is established at the point where the gold price is appealing enough for jewellery buyers, but not appealing enough for scrap sellers. Despite the analysts’ views expressed above, it is important to remember that over 70% of gold demand is still jewellery based.
Hence we saw a fall-off in jewellery demand into late 2005 as the gold price began its final surge across the US$700/oz mark before topping out in May 2006. Eventually gold just becomes too expensive, particularly for traditional jewellery buyers such as middle-class Indians and Chinese attempting to satisfy cultural obligations. The final push in the gold price was mostly driven by an investment rush into products such as exchange traded funds.
On the flipside, those holding gold “scrap”, which may take the form of any sort of trinket, are encouraged into cashing in when the price of gold rises.
The floor price thus becomes a wealth issue. As GDP growth in the developing world – particularly India and China – has been surging so has the disposable wealth of the average citizen. Thus it is no leap of logic to assume wealthier individuals can afford to pay more for gold. On this basis, the floor price of gold has been drifting up in recent years.
The problem is, however, that the floor only becomes apparent after the event, despite analysts often ascribing one on both a fundamental and technical basis.
But Natixis suggests that the overall trend remains up, given that there is no supply threat (2007 production is expected to grow, but only modestly), a lot of scrap was sold off last year, and European central bank sales are falling short of allowable quotas.
It will not be a straight line rise, nevertheless. Natixis expects ongoing high levels of volatility, and does not expect any spectacular prices to emerge quickly. The analysts suggest the 2007 average price “could well come in at a seemingly uninspiring figure around US$670/oz, pushing up to a 2008 average of US$700/oz.
Things are a little more positive in the silver market, as far as Natixis believes. Supply is also expected to be relatively unchanged in 2007, while producer hedging is expected to recede further. Sales by the official sector may fall, although Russian and Chinese selling remains a feature.
Scrap selling should remain more sizeable in silver, although one traditional source of scrap – photographic plates – is dwindling as digital photographic technology takes over.
Natixis concludes that silver’s fundamentals remain neutral, but that investment can still play a decisive role, leading to firmer prices. It is common, however, for the silver price to drift off in the northern summer, before regaining momentum in the fourth quarter. The analysts expect a positive shift up from 2006’s average price of US$11.55/oz to US$14.00/oz in 2007 and slightly higher in 2008.