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| Gold | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Andrew Schultz |
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| Reflecting ongoing uncertainty within global financial markets, the gold price remained well above the longer term average in the June quarter of 2008, falling by 3 per cent in the quarter to average US$897 an ounce. While the average was only moderately lower than in the March quarter of 2008, the gold price was volatile, moving within the range of US$850 and US$950 an ounce. This volatility stemmed from investors hedging against fluctuations in the value of the US dollar and significant declines in the valuation of global equity markets. More recently, on the back of falling oil prices and a weakening in the European Union economic outlook, the US dollar has appreciated against the euro. This has reduced investor demand for gold as a hedge against the US dollar, resulting in the price of gold falling to less than US$800 an ounce. Slowing global economic growth and ongoing uncertainty in financial markets are expected to persist in the short term, and this is expected to support the gold price. For 2008 as a whole, the gold price is forecast to average around US$880 an ounce, an increase of 26 per cent from the 2007 average price. |
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| Gold price to fall in 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In 2009, the US dollar denominated gold price is forecast to fall by 8 per cent to US$810 an ounce. Partly contributing to this fall is the expectation that the value of the US dollar will strengthen during 2009 in response to an assumed economic recovery in the United States. This is likely to place downward pressure on the gold price, as its appeal as an alternative store of value diminishes. Nevertheless, with uncertainty within global credit markets likely to remain, and strong demand for gold jewellery in emerging markets set to continue, the gold price is forecast to remain relatively high in 2009. The duration and extent of the assumed global economic slowdown and the period of instability associated with global credit markets pose risks for the gold price over the outlook period. For example, there may be periods of heightened perceptions of risk within credit markets, similar to those associated with the loss of investor confidence in major US mortgage lenders in early July 2008. This has the potential to increase investment demand for gold which, in turn, could place upward pressure on the gold price. |
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| World mine production to increase in 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In 2009, the US dollar denominated gold price is forecast to fall by 8 per cent to US$810 an ounce. Partly contributing to this fall is the expectation that the value of the US dollar will strengthen during 2009 in response to an assumed economic recovery in the United States. This is likely to place downward pressure on the gold price, as its appeal as an alternative store of value diminishes. Nevertheless, with uncertainty within global credit markets likely to remain, and strong demand for gold jewellery in emerging markets set to continue, the gold price is forecast to remain relatively high in 2009. The duration and extent of the assumed global economic slowdown and the period of instability associated with global credit markets pose risks for the gold price over the outlook period. For example, there may be periods of heightened perceptions of risk within credit markets, similar to those associated with the loss of investor confidence in major US mortgage lenders in early July 2008. This has the potential to increase investment demand for gold which, in turn, could place upward pressure on the gold price. |
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| Official sector sales to fall in the short term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gold supplied to the market through net gold sales by the official sector is forecast to fall by around 22 per cent to 375 tonnes in 2008. This fall is expected mainly because of lower sales by central banks which are signatories to the European Central Bank Gold Agreement (CBGA). For the six months to June 2008, CBGA net sales were around 27 per cent lower than for the corresponding period of 2007. The CBGA places a collective limit of 500 tonnes a year on the quantity of gold signatories, comprising 18 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. Official sector sales are forecast to remain stable in 2009, at 375 tonnes, partly through European central banks regulating sales to meet publicly stated sales targets over the five year lifetime of the agreement. The possibility of significant sales from entities with large reserves of gold yet to sell in significant quantities, such as the German and Italian central banks and the International Monetary Fund, poses an upside risk to the forecast for net sales over the outlook period. |
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| Gold fabrication demand to rise in 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| An important driver of gold demand is gold fabrication, of which jewellery consumption is the largest component. Reflecting high prices, jewellery consumption in 2008 is forecast to fall to its lowest since 1989, resulting in gold fabrication consumption decreasing by 13 per cent to 2679 tonnes. Lower demand for jewellery is expected to be most evident in the important market of India where the high and volatile gold price has combined with rising inflation and higher interest rates to dampen spending on jewellery. Partly recovering from the decline in 2008, fabrication demand is forecast to rise, with consumption increasing by 7 per cent in 2009 to 2863 tonnes. This recovery is expected to be driven by India, where an expected reduction in price volatility and a lower price of gold could encourage increased consumption. Growth in demand for jewellery in China is also forecast to remain strong, reflecting continuing growth in household incomes. However, the positive effect on jewellery demand from the forecast fall in the gold price is expected to be partially offset by reduced spending on jewellery in developed countries as a result of slower economic growth. |
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| Producer dehedging to fall in 2008 and 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Producer hedging involves gold producers borrowing gold from central banks and selling it on the spot market in order to reduce exposure to the risk of lower gold prices at the time of actual production. As a result, 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 exceeds new producer hedging, imposes upward pressure on the gold price by reducing gold supplied to the spot market. With gold producers seeking to take advantage of the historically high gold price and a reluctance to commit to new hedge positions in the face of gold price volatility, the size of remaining hedge books is forecast to continue to diminish. As such, dehedging is forecast to continue, resulting in 320 tonnes in 2008 and 200 tonnes in 2009 being returned to central banks. AngloGold Ashanti is expected to contribute most to dehedging in 2008, with the company already reducing its hedge book by around 130 tonnes, or one-third, in the first half of the year. The falling rate of dehedging over the outlook period largely represents the reduced size of remaining hedged positions maintained by gold producers. |
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| Australian gold production falls in 2007-08… | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Australia’s gold mine production is estimated to have fallen by around 9 per cent to 227 tonnes in 2007-08, the lowest annual production since 1989. This fall reflects decreased production from established mines, lower than expected output from new projects and the closure of a number of older mines. The combined production from Australia’s ten largest gold projects was around 6 per cent lower in 2007-08 than in the previous year. Lower ore grades, changes to mine sequencing, and gas shortages attributable to damage at the Varanus Island gas plant have all contributed to this outcome. The closure of Norilsk’s Thunderbox project and the placing on care and maintenance of Apex Minerals’ Wiluna project and Harmony Gold’s Mount Magnet project reduced production by around 7 tonnes. There was also lower than expected production from new projects, a number of which encountered lower than expected ore grades, or were subject to construction delays and suspensions. |
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| …but is forecast to rise in 2008-09 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In 2008-09, Australia’s total gold mine production is forecast to rise by 4 per cent to 236 tonnes as a number of new medium to large-scale projects are expected to begin commercial production. The largest of these is the Boddington joint venture redevelopment in Western Australia (averaging 26.4 tonnes per year) which is expected to begin production in early 2009. Other significant projects forecast to begin commercial production during 2008-09 include Lihir Gold Limited’s Ballarat East redevelopment (6.2 tonnes), St Barbara’s Gwalia Deeps expansion (6.2 tonnes), the redeveloped Apex Minerals’ Wiluna project (6.2 tonnes) and Avoca’s Higginsville project (5.9 tonnes). Reflecting trends in Australian mine production, the volume of Australian gold exports is estimated to have fallen by around 5 per cent to 382 tonnes in 2007-08. As mine production increases in 2008-09, export volumes are forecast to rise by 1 per cent to 384 tonnes. The trend for export volumes to remain above domestic gold production in Australia is expected to continue in the short term as gold dore (up to 99 per cent gold content) and scrap are sourced from overseas, refined into gold bullion and then exported. The value of Australian gold exports in 2007-08 is estimated to have risen by 6 per cent to $10.9 billion. In 2008-09, Australian export earnings from gold are forecast to grow by around 12 per cent to $12.2 billion both as export volumes rise in response to increased Australian mine production and as a result of an assumed lower value of the Australian dollar. |
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