OUTLOOK 05: Gold Bulls Have More To Cheer Than Limp USD
By Nicholas Sinclair Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--The increasingly gloomy outlook for the U.S. dollar has become a persuasive rallying cry for gold bulls, but several leading analysts and investors say gold will have more going for it in 2005 than a cooperative currency market.
"If that was the only thing, I probably wouldn't be as bullish," said Daniel Hynes, natural resources analyst with Australia's ANZ Institutional Banking, who believes the yellow metal could reach US$500 a troy ounce before looking toppish.
The faltering U.S. dollar "is an important plank (of support for gold), but I don't think it's the sole one," said Alan Heap, global commodity analyst with Citigroup Smith Barney, who "certainly wouldn't be surprised" to see gold hit US$500/oz.
[Right now gold and silver are tied to the frn, almost 100% but that will not always be the case. As I said before remember gold and silver are not becoming more valuable on their own; the frn is becoming worth less...so if it rallies then of course gold and silver will fall...soon gold and silver will apreciate regardless of the frn's machinations...]
Along with others, Hynes and Heap have detected a positive shift in gold's supply and demand fundamentals that will complement its strong inverse correlation with the U.S. dollar if, as many expect, the latter continues to weaken.
Bullion's negative relationship with the U.S. dollar is well established, with a historical correlation of around 0.8 to a trade-weighted basket of rival currencies. This is based on several factors, including gold's appeal to some as an alternative currency, and the fact that a weak dollar renders gold cheaper to non-U.S. buyers.
Not only is fabrication demand firming, but mine supply is on the decline and central bank supply, though not necessarily falling, is considered very much under control, analysts say.
As a result, gold is likely to scale new multiyear peaks in 2005 and post an average price somewhere in the vicinity of the 16-year highs witnessed in recent days.
Indeed, 2004 has been a strong year for bullion with the spot price of gold rising just over 8%. Much more impressive has been the yellow metal's rise since May 10, when it touched its low point for the year at US$371.50/oz.
At 0315 GMT, spot gold was quoted at US$449.30/oz.
"We are definitely in a positive environment... and that's going to remain until the fundamentals deteriorate, and we don't see that changing," said Evy Hambro of Merrill Lynch Investment Managers, one of the world's largest managers of gold equity investments.
On the demand side of the fundamental equation, gold-watchers are particularly encouraged by the rising trend in fabrication, underscored by increased jewelry demand.
Several analysts cited recent figures from the London-based precious metals consultancy GFMS Ltd. and the World Gold Council that showed rising demand for gold jewelry, by far the largest component of fabrication.
"And that's quite a material turnaround," Citigroup's Heap said, noting that fabrication had been sliding for the past several years.
"Generally, when the price is higher people tend to spend the same amount of money and just buy less gold, but (the rising price) doesn't seem to have had such an effect this time around," Hynes said.
Heap said there are two factors at work.
"One has been a generally more buoyant global economic picture, but also I think, probably consumers have become somewhat more used to, and accepting of, higher gold prices," he said.
From the standpoint of gold as an investment tool, several traders and analysts have recently cautioned that the record high net speculative long position on New York's Comex futures exchange is a cause for concern going into 2005.
"At some point there will be profit-taking there," Heap said, echoing the views of many.
But Citigroup's Heap was quick to add that the futures market is only one source, albeit a major one, of speculative demand.
"We've seen a pickup in bar hoarding in recent times," he said, adding that there is further scope for increased speculative physical holdings according to GFMS.
"So it is entirely possible we could see continued support from the speculative community even if we saw a sell-off on Comex," Heap said.
Central Banks Sales Could Fall; Mine Supply Pressured
If a shaky U.S. dollar and a surprisingly firm demand outlook aren't enough, investors and analysts are also encouraged by the supply side of the market.
Historically, gold supply has been notoriously difficult to gauge thanks to a heavy overhang of stocks, in the form of massive central bank reserves - notwithstanding large sales in recent years by European and other central banks.
The signing of a five-year pact among 15 European central banks in 1999, capping aggregate bullion sales at 400 tons a year, was thus welcomed as a source of supply certainty.
The market was encouraged when, in early 2004, the same group extended their deal for another five years, this time boosting the annual limit to 500 tons.
But several observers now believe it possible for actual European sales to fall below the total five-year limit, perhaps by a wide margin.
"Based on announced or considered sales... it is hard to get to the total of 2,500 tons over five years and we continue to suspect that the risk may be that less gold is sold over the five years from October 2004," UBS analyst John Reade said.
Partly as a result of the weakening U.S. dollar, the likelihood of falling gold production is no less compelling, Merrill Lynch fund manager Hambro, and others, say.
"We've got a situation where (mined) production of gold is going to be declining for the foreseeable future," he said, alluding to GFMS figures and projections.
According to the London consultancy, mine output was essentially flat at 2,590 tons in 2003 and is forecast to slip to 2,506 tons in 2004.
"Something like a third of South African production is now (cash flow) negative" Heap said, referring to severe output constraints affecting the world's largest producing nation, thanks to a soaring rand that is undercutting revenue.
Ignoring currency effects, Hambro believes there is another reason why output will suffer.
"One of the big changes in the mining sector as a whole has been a significant cut (in) exploration expenditure, which is obviously reducing the probability of finding new projects to exploit," the leading fund manager said.
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