Thomson Reuters GFMS is perhaps the go-to organisation for detailed gold analysis although, as with any such organisation, its interpretations of data may be open to question by some who disagree, and its projections don’t always come about. Even so, gold market followers may be disturbed by GFMS’s latest analysis and projections which suggest that the gold price will only average $1,225 this year—actually 13% down on last year’s average figure of $1,411.23. So far this year gold has managed to average around $1,296 to date and, at the time of writing, is a little over $1,300. Thus the GFMS report suggests that gold will fall over the next few months, perhaps down to as low as $1,100 but may pick up towards the end of the year to around $1,400. However looking further ahead there is little comfort for the bulls as GFMS is predicting further weakness in 2015.
GFMS statistics are used by a number of organisations and companies for their own internal usage and the latest projections are thus likely to impact forward new mine project planning and financing which could have a longer term impact on mine production – but even here GFMS’s latest analysis has come up with figures for 2013 mine production for gold which is counter to the assumptions made by many other analysts and observer. GFMS thus puts 2013 new mine production of gold at a record 3,022 tonnes, a 6% gain over 2012. This is perhaps 200–300 tonnes higher than that predicted by many other gold observers, but the GFMS statistical team is more likely to be correct in this than others whose figures have perhaps more been based on conjecture than actual fact.
As we have noted in the past on Mineweb a fall in the metal price often, at least initially, has the opposite effect to that which the market might anticipate. It results in higher production as mines which have that capability mine to higher grades, but at the same mill throughput, in an attempt to maintain revenues, which leads to higher output—but at the expense of reducing reserves and resources and potentially, overall mine life. Similarly, those gold mining companies under pressure to cut operating unit costs from their shareholders—and we have seen plenty of these pressures over the past year—will also look to mine higher grades and much of the ‘cost-cutting’ which actually has materialised is not necessarily cutting costs per se, but has been achieved by inceasing output (through high grading) without truly changing operating expenditures.
Of course new mines which are already down the development pipeline will also be brought on stream, adding to overall production.
This can only go on for so long though and ultimately low prices do filter down to force production cuts as continually uneconomic operations are closed down, older mines find it impossible to high grade and new projects at the inception stage are deferred. But this can all take 2 or 3 years to filter through by which time, the miners hope, prices will have improved again. But then, conversely, production will fall as the mines can revert to working lower grade ores, while the deferred projects will still take several years to be brought to production at best. Hence some of the cyclicality seen in the mining sector.
Thus new mined gold output may not fall back even in the current year should gold prices stay at or around current levels which put many even large gold mining operations into the marginal category on an all in sustaining costs basis.
But the GFMS report does contain some contradictions which could result in positivity for the gold price. With scrap sales falling back drastically at the lower prices, and not expected to pick up much if at all, this would seem to counter to an extent the higher mine production. Jewellery demand in Asia (including the Middle East) is seen as having added 21% in 2013 and demand for investment bars is said to have ‘rocketed’ by 43%. Thus world-wide, jewellery fabrication plus coin and bar purchases is reckoned to have soared by 24% to reach 4,045 tonnes, compared with the previously noted world mine production of 3,022 tonnes.
Another factor which may at least give the gold bulls some heart is the estimate that in 2014 demand for gold for jewellery fabrication and general bar and coin investment demand will likely exceed the total of new mine production plus scrap. However other elements in the equation could end up bringing fundamentals into balance. But if sales out of gold ETFs fall away this year, or even turn around to purchases as they have done to date then matters could yet prove to be different.
GFMS also adds a caveat that any relaxation of the import restrictions in India, particularly the 80:20 rule (20% of gold imports must be earmarked for re-export) could unleash further fresh demand from that gold-hungry nation, which would add to upside potential. And we would add continuing unrest in Ukraine and any moves to impose punitive sanctions on Russia, which would lead to likely retaliation, could also impact prices positively.
The big question though is what is likely to happen to Chinese demand after it reached record levels in 2013. There are signs that this may be slowing down after a new record for imports in the first two months of the year. If the slowdown is maintained—and GFMS sees a consolidation in Chinese demand rather than an increase then this could be another factor suggesting less support for the gold price unless it should fall significantly lower.
GFMS is expecting also a downward drift to resume through the middle of the year as investors concentrate on US monetary policy and as Treasury yields rise, while the prospects of economic recovery also point to equities as a more attractive asset class than gold – the Goldman Sachs viewpoint
And the sting in the tail of the GFMS report for the gold investor is that it sees the fundamentals pure and simple pointing to a trading range of $1,200–$1,300 in the short term and that there is a distinct possibility of a slump towards $1,100, while as the year unfolds, seasonal strengthening physical demand could then propel prices towards $1,400 again. The report sees investor appetite as not being strong and that, without this important element returning, the gold price is expected to resume a further downward course in 2015.
Lawrence Williams
Mineweb
