Mostly: Classical

[amarksp]

Martin M sighting...

St. LOUIS (ResourceInvestor.com) -- It’s no surprise that falling gold production in South Africa has led global mine supply to be flat over the past few years. In fact, the market barely reacted to recent news that China is on pace to overtake South Africa as the world’s top gold producer.

“A decline in output seems to be baked into the cake just in terms of what our models say, and our models are driven by past mine supply and past real price of gold,” Dr. Martin Murenbeeld, chief economist of the Dundee Group of Companies, told Resource Investor.




“The mines are still suffering, actually, from the period of time in the late 1990s when the gold price was so depressed. It takes an upwards of 10 years for companies to find gold and then get it out of the ground and get it into the market. We’re seven years past the bottom of the gold price, so certainly for the next three or four years we’re going to see mine supply be relatively weak.”

According to the VM Group’s “The Yellow Book”, global mine supply is expected to be little changed from levels over the past five years. In 2008, mine production is expected to total 2.414 million ounces, compared to an estimated 2.413 million ounces in 2007. Output was 2.367 million ounces in 2006, 2.411 million ounces in 2005, 2.351 million ounces in 2004 and 2.512 million ounces in 2003.

The VM Group estimates that 2008 will see a gold supply surplus of 123 tonnes. The analysts noted, however, that this surplus could easily turn into a deficit if any of the major supply and demand components changes, including global mine supply.

But many gold analysts believe mine supply is likely to remain unchanged - if not fall lower - for the next few years.

“I think there will be some increases here and there,” Murenbeeld said. “But overall, I think mine output is going to continue to be flat and possibly decline a little bit, and I mean that for probably the next three to four years.”

Murenbeeld said it doesn’t matter that China may overtake South Africa in terms of gold mine production - a lack of supply worldwide is bullish for gold.

“I’m more concerned with the overall amount of gold coming out, and it’s not clear to me that the overall amount of gold coming out of the ground over the next few years will rise,” he said. “So whether South Africa is in decline and China is in ascendancy, the question really is, ‘What is the total amount of supply that comes into the world market?’ If that doesn’t go up, it’s favourable for the gold price.

“It doesn’t matter that South Africa specifically is declining in production and China is rising in production; my concern is what is the sum of the total amount of production, assuming, of course, that all production is the same.”

According to Murenbeeld, lower production logically has a positive impact on the gold price.

“We have some formulas, a sort of simple rule of thumb that we use, that a 10% decline in gold production will tend to raise the price of gold by about 5%,” he said.

Using this formula among other scenarios, Murenbeeld estimates in his latest “Gold Update” on 21 December that the probability-weighted average for gold in 2008 will be $860.50 per ounce.

As the gold price rises, Murenbeeld said he doesn’t expect mine supply to remain flat in the long term.

“Now over time with the higher gold price, you’d expect to see more gold output. So let’s say in the second half of the next decade, 2015 onwards, you’d expect to see more mine supply, but at this point that’s a guesstimate.”

Despite dwindling gold mine supply in South Africa and flat mine supply globally, he said production is not the main issue that will affect the gold price.

“In my opinion, that is not a key issue at this point in time,” Murenbeeld said. “I’m not concerned about production, and I’m not particularly concerned about central bank supply, given that that’s locked up for almost another two years now to the end of September 2009. So I don’t think supply is going to be the issue.

“The issue is much more in the financial realm: What will the world’s economy look like, what will the dollar do, what will inflation be like, what will oil prices do, what will central banks do with money supply, to what degree will they be reflating? As you look further down, we have the great baby boom retirement and how the government is going to handle that. Will that mean more money printing?

“Those are the things that I think are key to the medium-term and longer-term outlook for gold. At some point, presumably, you will get some more good production. If the gold price averages $1,000, presumably some mines that weren’t producing back at $500, or heaven forbid $250, they may be producing at $1,000. So there will be some impact from mine supply, but I don’t think that’s an issue for the next couple years.”

Gold for February delivery ended today up $10.90 at $842.70 an ounce on the New York Mercantile Exchange. Gold futures are up nearly a quarter from a 52-week low of $639.50 per ounce earlier this year.