LONDON (Mineweb.com) -- In what is seen as encouraging news for gold mines coming up, futures contracts for the yellow metal have been rising rapidly.
According to Wednesday’s note by John Meyer, analyst at Numis Securities in London, gold companies are able to lock in a forward price of $619/oz on an 8-year forward contract, under the current market environment.
A futures contract is a document in which an investor agrees to buy or sell a specific amount of a commodity on a specific future date.
By Wednesday afternoon in Johannesburg, the spot price of gold was at $513/oz, its highest since 1983.
“The strong forward pricing environment and willingness of the market to fix in forward contracts at over $600/oz is encouraging news for gold mining companies,” says the note.
Meyer adds that financing projects at these price levels becomes compelling as cash operating margins increase to over 100% for many gold mines.
Meyer says that according to the Raw Materials Group, the world average cash cost in the September quarter was $300/oz with average production costs at $362/oz.
“Cost increases over the next 18 months would have to be huge to make the 18-month forward price a loss maker,” says the note.
As a result of the good news, the note also says that Numis is reviewing its longer-term gold forecast with a view to revising it higher than its current $425/oz. The firm recommends Peter Hambro, the Russian gold miner, as its preferred gold share in the UK market.
Top analyst right so far
Way back in June, David Davis, Johannesburg’s top-rated gold analyst according to the weekly Financial Mail, said much higher gold prices were possible over the next decade.
These include prices of $700/oz by the end of 2008, $800/oz by the end of 2010 and $1,200/oz by the end of 2015. Since the note, titled: The Future of Gold, was released in the beginning of June, the price of gold has moved up nearly $100/oz.
“Our study indicates that gold supply is inexorably falling behind demand as a diminishing number of new reserves fail to compensate for dying mines. This has been happening for some time but, until now, the effect has been masked by Central Bank sales and producer hedging,” says the note, “However, this will soon come to an end, and that will be the turnaround when the supply-demand imbalance heats up the gold price.”
Davis did however warn of a significant increase in costs. “The future cycle of events is likely to be different. Capital costs, working costs, labour costs, royalties and environmental costs are undergoing an upward quantum change.”
He did however add that the higher costs would be good for the gold price.
“We believe the significant increase in costs will change the current supply US$ gold price dynamics. The overall effect will likely trigger an increase in the gold price, by an amount that will satisfy the new supply and demand equation,” said Davis, “Higher costs are also likely to accelerate the downward trend in reserves and consequently mine supply.”
In the short term gold has overshot many predictions. One trader told Mineweb last week that the price would peak at $505/oz in the following few weeks. While technical analysts have said that if gold were to close above the $509.20/oz peak seen in 1983, then there could be another strong run.
Silver at $9/oz?
That could push silver into $9/oz territory. The white metal has been outperforming gold since the beginning of December if one looks at the well-known ratio between the two precious metals, dividing the gold price by the silver price.
Over the past two years, the ratio has not moved out of 50-70 range, with 50 reflecting an outperforming silver price and 70 stronger gold.
Since September the ratio has remained over 60 but has dipped below that since the start of December, and is currently just over 58.
Back in April 2004, the ratio dipped to 52 as silver rose above $8/oz and gold traded at $420/oz.
If the ratio were to remain where it is, gold would need to reach $522/oz for silver to hit $9/oz. At just after 6am in New York on Wednesday, the price traded at a high of $8.86/oz.
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