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Andrew Schultz
The gold price rose by 14 per cent to an average of US$908 an ounce in the March quarter 2009, compared with US$797 an ounce in the December quarter 2008. This increase in price in the March quarter reflected strong retail demand in the form of gold bullion coins, bars and gold bought through exchange-traded funds listed on worldwide stock markets. Retail demand largely grew in response to the sharp fall in value of other asset classes, such as property and equities, and the perception of relatively low and volatile returns from these assets. Gold purchases in the March quarter followed a widespread sale of commodity holdings by hedge funds in late 2008, as a result of the rapid weakening in the world economic outlook.
Historically, institutional investors buy gold as a hedge against a decline in the value of the US dollar. Although the relationship between the price of gold and the value of the US dollar was not apparent in the March quarter 2009, the recent decline in the value of the US dollar against other internationally traded currencies contributed to the rise of the gold price to more than US$950 an ounce in early June 2009.
With a relatively weak world economic outlook and expected volatility in world equity markets, the gold price is forecast to remain relatively high in the remainder of 2009, averaging around US$910 for 2009 as a whole.
In 2010, the gold price is forecast to remain relatively high in the first half of the year, before easing gradually during the second half. A gradual improvement in global economic performance during 2010 is expected to result in investors changing their focus to other asset classes, especially in the latter half of 2010. Although investors’ sentiment toward other asset classes is expected to improve, the assumption of a gradual world economic recovery is expected to sustain the appeal of gold as a lower risk asset, and hence sustain its price. For 2010 as a whole, the price of gold is forecast to average slightly higher at US$930 an ounce.
A major risk factor to this price outlook is the assumed pace of the world economic recovery. For investors, the appeal of gold as a store of value increases during periods of market volatility and uncertainty. As such, any weakening in confidence in global financial markets, downgrading of world economic prospects, or a further sharp decline in the value of the US dollar against other currencies all have the potential to place significant upward pressure on the gold price. Conversely, if the pace of the world economic recovery proves to be markedly rapid and stronger than currently expected, considerable downward price pressure could emerge on gold, as investors’ confidence in other asset classes returns.
World gold mine production in 2009 is forecast to increase by 2 per cent to 2456 tonnes, however production is likely to remain well below the record of 2640 tonnes in 2001. Increases in production in Indonesia, Australia, the Russian Federation and China are expected to more than offset a decline in South Africa.
In Indonesia, reflecting the mining of higher grade ores, an increase of around 31 tonnes to 68 tonnes is expected from Grasberg, the world’s largest producing mine. Growth in gold production from the Russian Federation is expected to stem from the first full year of production from Kinross’ Kupol project (producing around 20 tonnes in 2009) and increasing production from Peter Hambro Mining’s Pioneer project. In China, growing production from numerous small and medium sized gold producers is expected to continue in response to the relatively high gold price.
The long-term trend of falling mine production in South Africa is forecast to continue in 2009, but at a reduced rate compared with 2008. Declining ore grades, power supply rationing because of electricity shortages, and underground mining labour shortages reduced production in 2008. These factors are expected to persist across the industry. Modest production increases from Gold Fields’ Kloof and Driefontein projects are forecast to be more than offset by production declines from the South African operations of Anglogold Ashanti and Harmony Gold.
In 2010, global mine production is forecast to remain at a level similar to 2009. Although production is forecast to increase in Australia, China, the Russian Federation and Africa, this is expected to be largely offset by falling production in Indonesia as a result of lower grade ores.
Gold fabrication consists of gold used in jewellery, electronics, dental applications, medals, coins and other industrial uses. In the March quarter 2009, gold for use in jewellery, the largest component of gold fabrication, is estimated to have fallen by around 26 per cent as consumer demand for jewellery declined in response to weaker economic conditions and a high gold price. Demand in India, historically the largest market for jewellery, fell by more than 50 per cent in the quarter. Reflecting falling demand for consumer goods worldwide, gold used in electronics and other industrial applications also declined. Total gold fabrication demand is estimated to have fallen year on year by around 27 per cent in the quarter.
For 2009 as a whole, gold fabrication demand is forecast to fall by more than 16 per cent to 2403 tonnes, its lowest since 1988.
With an assumed modest recovery in world economic growth in 2010, gold fabrication is forecast to rise by 6 per cent to 2555 tonnes. In response to expected stronger economic recovery in developing countries, demand from India and China is expected to drive fabrication consumption growth through an increase in domestic jewellery expenditure. Reflecting its reliance on export markets for jewellery, gold fabrication consumption in the large Middle Eastern wholesale markets is forecast to grow only modestly in 2010.
Net sales of gold by the official sector in 2009 are forecast to fall by around 24 per cent to 186 tonnes, contributing to weaker growth in gold supplied to the market. This forecast fall is largely a result of reduced net sales by central banks which are signatories to the European Central Bank Gold Agreement (CBGA).
The CBGA places a collective limit of 500 tonnes a year on the quantity of gold which signatories (comprising 15 European central banks, including the European Central Bank) are permitted to sell from their reserves. The current CBGA began in 2004 and is set to expire in September 2009.
For the first three months of 2009, CBGA members, predominantly France and the European Central Bank, have completed net sales of around 78 tonnes of gold. Increased buying of gold has been reported in 2009 from non-CBGA central banks, especially from the Russian Federation (12 tonnes to March 2009) and Venezuela (7 tonnes in January 2009). After recently reporting updated gold reserves estimates, China’s central bank has indicated an increase in gold reserves since 2003 of more than 450 tonnes, to 1054 tonnes.
With a high proportion of reserves comprised of gold, central banks in many European countries are expected to continue net gold sales over the outlook period. However, reflecting gold’s current appeal as a low-risk asset, net official sector sales are forecast to continue to decline to around 166 tonnes in 2010.
Producer hedging involves gold producers borrowing gold from central banks and selling it on the spot market, to reduce their exposure to the risk of lower gold prices at the time of actual production. As a result, the value of future mine production of gold is effectively brought forward.
Dehedging, through the buying back or unwinding of these hedged positions, has largely occurred because of producers’ expectations of an increasing gold price. Net dehedging, occurring when gold repayments to central banks exceed new producer hedging, imposes upward pressure on the current gold price through the reduction of gold supplied to the spot market.
Dehedging is forecast to decrease by more than 200 tonnes to 142 tonnes in 2009, and to fall by a further 90 tonnes in 2010. The extent to which future dehedging can take place is limited by the existing industry hedge book. Nevertheless, the prospect of the gold price remaining historically high is expected to encourage companies with existing hedged positions, such as Anglogold Ashanti and Barrick Gold, to continue dehedging.
Australian gold mine production in 2008-09 is estimated to fall by 4 per cent to 219 tonnes. The main contributor to this decrease is Anglogold Ashanti’s Sunrise Dam, where the cessation of mining in a large open pit will lead to an estimated fall of more than 4 tonnes. Significant decreases will also occur at Newcrest’s Cadia Valley operations (down by 5 tonnes) while the cessation of mining at Harmony Gold’s previously owned Mt Magnet project will result in an estimated 3 tonne decrease in 2008-09. Partly offsetting these falls are increases in production from the Kalgoorlie Joint Venture Super Pit (up 2 tonnes) and Tasmania’s Beaconsfield mine (up 1 tonne). The start-up of St Barbara’s Leonora operations, Avoca’s Higginsville project and Apex Minerals’ Wiluna redevelopment during the year is estimated to contribute 7.5 tonnes to total production.
An increase in Australian gold production of 9 per cent to 239 tonnes is forecast for 2009-10, reflecting the expected start-up of around 14 new gold projects and the ramping up of several others. The Anglogold Ashanti/Newmont redevelopment of Boddington (28 to 33 tonnes a year) and Newcrest’s Ridgeway Deeps (6 tonnes a year) are the largest projects to begin producing during the outlook period. Production from Apex Minerals’ Wiluna redevelopment and OzMinerals’ Prominent Hill are forecast to increase in 2009-10 as these operations approach full capacity. The strong rise in the Australian dollar denominated gold price since late 2008 has improved the economic viability of many existing operations and encouraged the development of several small to medium sized gold projects.
The volume of Australian gold exports is estimated to rise by 23 per cent to 469 tonnes in 2008-09. This is the highest annual volume of gold exports on record, and has been driven by strong growth in the export of refined gold derived from scrap sourced mainly from Asian markets. In 2009-10, gold export volumes are forecast to decline slightly to 466 tonnes. The demand for Australia’s gold refining capacity within the Asian region is expected to continue.
The value of Australian gold exports is estimated to increase by 61 per cent to $17.5 billion in 2008-09, which is the highest annual value of gold exports on record. Despite growth in export volumes, a 30 per cent rise of the Australian dollar denominated gold price is the main factor driving this forecast increase. In 2009-10, export earnings from gold are forecast to rise by a further 3 per cent to $18.0 billion.
| Gold outlook | ||||||||
2008 |
2009 |
f |
2010 |
f |
% change |
|||
|
||||||||
| World | ||||||||
| Fabrication consumption | t |
2 850 |
2 403 |
2 555 |
6.3 |
|||
| Mine production | t |
2 415 |
2 456 |
2 473 |
0.7 |
|||
| Scrap sales | t |
1218 |
1 050 |
950 |
– 9.5 |
|||
| Net stock sales | t |
– 783 |
–1 103 |
– 868 |
– 21.3 |
|||
| – official sector | t |
246 |
186 |
166 |
– 10.8 |
|||
| – private sector | t |
(671) |
(1147) |
(982) |
||||
| – producer hedging | t |
(358) |
(142) |
(52) |
||||
| Price | US$/oz |
873 |
908 |
930 |
2.4 |
|||
|
||||||||
2007-08 |
2008-09 |
s |
2009-10 |
f |
||||
|
||||||||
| Australia | ||||||||
| Mine production | t |
228 |
219 |
239 |
9.1 |
|||
| Exports | t |
382 |
469 |
466 |
– 0.6 |
|||
| – value | A$m |
10 903 |
17 516 |
18 033 |
3.0 |
|||
| Price | A$/oz |
917 |
1186 |
1203 |
1.4 |
|||