Macquarie: Global Gold Outlook - Strong, Strong, Stronger
4/06/2007
Last week, Macquarie Research Equities (MRE) revised their gold price forecasts upwards. MRE’s more bullish gold price outlook, particularly in 2008 and 2009, is based on a number of key drivers including a muted supply response to higher prices, lower than expected central bank sales, speculators’ aversion to aggressively shorting gold in a post 9/11 world, continued producer dehedging, and likely continued pressure on the US dollar. In MRE’s view, the global macroeconomic environment and gold’s supply/demand fundamentals are supportive of sustaining today’s historically high nominal gold prices in the near and medium term. MRE highlight their top picks in the sector to take advantage of this continuing strength in gold.
Revisions MRE have upgraded their gold price forecasts to US$678/oz in 2007, and $720/oz in 2008, peaking in 4Q08 at US$745/oz. In MRE’s view, the global macroeconomic environment and gold’s supply/demand fundamentals are supportive of sustained historically high nominal gold prices into the medium term.
Lower than expected central bank sales While central banks continue to be net sellers, sales over the past year and a quarter have been 20% lower than agreed maximum quotas under the renewed European Central Bank Gold Agreement (CBGA). Under the initial CBGA in 1999, 15 European central banks agreed to sell collectively a maximum of 400t a year for the next five years. They did exactly that, and there was a perceptible clamour among signatories to sell as quickly and as much as possible over that period. Nonetheless, it achieved its purpose, namely to provide certainty to the gold market and remove the substantial overhang of the prospect of a flood of central bank sales.
In addition, unlike base metals and bulk commodities, primary gold supply is not growing, despite the higher gold prices, because of the increasing challenges the industry faces in assembling a project team and the requisite resources. New mines are essentially replacing depleting overall production, rather than growing it. It is also a function of the significant time lag from discovery to production, which can be 10 years, or more. Lower exploration spending during the late 1990s and early 2000s meant the project pipeline had been neglected. In aggregate, the global gold sector has been, and continues to be, on the back foot when it comes to increasing supply in response to higher gold prices. When the CBGA was renewed in 2004, with a 500t ceiling for a further five years, selling continued at the maximum rate in year 1. Since then, however, sales have been unexpectedly lower, with only 400t sold in year 2, and year 3 starting out the same.
Speculators' continued aversion to aggressively short gold In a post 9/11 world, heightened global geopolitical risks, Middle East turmoil, inflationary concerns and oil price shock potential have combined to discourage the level of aggressive short selling of gold that MRE saw in the 1990s. Net non-commercial positions on the COMEX remain long, reflecting positive sentiment, but still well below recent year peaks
Continued producer dehedging The extent of producer dehedging has been greater than we expected. The global gold hedge-book peaked at the end of 1999 at 2,958t (95Moz), according to Gold Fields Mineral Services (GFMS). Since then, producers have been both delivering into their hedge-books and buying them back so that the outstanding global hedge-book is now less than half its peak, at 1,364t (44Moz). This year we have seen Barrick and Lihir continue the trend, buying back a combined 4moz. The market’s appetite for unhedged gold companies suggests that net producer dehedging may continue for some time yet.
Continued pressure on the US dollar There is a well-known inverse correlation between the US dollar and gold prices. The table overleaf looks at this relationship over a decade. MRE’s forecast of US$1.40/Euro by mid-2008 suggests a gold price range between US$715/oz and US$765/oz. US$ depreciation may yet have some room to play out, particularly against Asian currencies, based on relatively slower US economic growth and interest rate differentials.
First Dutch Gold Dore Bar
