London Gold Market Report

Thu, Aug 28 2008, 12:59 GMT
by Adrian Ash

Gold Recovers One-Third of "Summer Slump"; No New Mining Supply Below $1,200 per Oz

THE SPOT PRICE OF GOLD BULLION rose yet again in London on Thursday, touching $840 an ounce just ahead of the Wall Street open and recovering almost one-third of the 21% plunge witnessed since mid-July.

"Gold is still capped by the big resistance at $846," reckons Peter Tse at Scotia Mocatta in Hong Kong, speaking earlier to Reuters.

"I don't think much will happen ahead of the long US [Labor Day] weekend."

Longer-term, however, the Gold Price is set to reach $850 within the next month and print $900 an ounce by November, believes John Reade – the highly respected head of metals trading at UBS in London.

First, global Demand for Physical Gold has been "unprecedented" over the last three weeks, Reade told his clients this morning. Second, the hot-money froth of hedge funds trading gold futures and options has also come off now that "Substantial Long Liquidation has occurred."

As for the US currency's 10% bounce vs. the Euro of the last five weeks – seen by several analysts as a key driver of Gold's sharp losses this summer – "the Dollar appears to have topped out for now," says Reade.

This morning in London the Euro reached $1.4790, more than 2¢ above Tuesday's six-month low.

The Gold Price in Euros rose faster still, however, jumping 1% to a fresh two-week high of €568 per ounce.

"We had these [supply] problems three months ago," said Wolfgang Wrzesniok-Rossbach of precious-metals refinery Heraeus on Wednesday, "but the price was still high.

"Now the Gold Prices are much lower, this is why people have come in and invested their money in gold."

Heraeus says its customers – mainly industrial and jewelry manufacturers – are waiting up to two weeks for delivery. Private investors in Europe and North America continue to face a Gold Coins Shortage.

And over in India – destination for one ounce in every five sold worldwide last year – the "demand destruction" sparked by record-high Gold Prices this spring is fast being reversed according to the World Gold Council's local office.

"For this year so far," said WGC director Dharmesh Sodah to Sify.com this morning, "gold has seen its lowest prices in the past few days, resulting in high sales.

"Jewelers in Gujarat and Maharashtra are optimistic about Guru Pushya Nakshatra," he added, pointing to today's Hindu festival – an "auspicious time to Buy Gold," according to Jayanti Patel of the Tanishq jewelry brand, now with 91 stores in 64 cities.

India's annual gold consumption rose 42% between 1996 and 2007, hitting 722 tonnes last year.

On the other side of the Gold Market, however, gold mining companies hoping to meet this surge in global demand continue to struggle.

"The margins between costs and the Gold Price are shrinking," noted Nick Goodwin, an analyst at T-Sec in Johannesburg, to Reuters today, "as the companies try to dig out a wasting asset.

"This is not an easy business."

South Africa's Gold Fields Ltd. – the world's fourth-largest gold miner – paid a total of $869 per ounce of production in the April-June period. The CEO, Nick Holland, says he wants to cut this "all-in cost" to $725 by March '09.

After forecasting a Gold Price of $1,500 earlier this month, Holland told Creamer's Mining Weekly on Monday that "there’s not enough money today to replace the infrastructure that exists today at Gold Fields.

"If you tried to build these mines today, you would need a $2,000 price and higher to justify the investment.

"Replacement costs of all of the operations [mean] you could not recoup your investment today at these prices. You could not build these facilities today anywhere."

Mining-stock analyst Ian Henderson, manager of the $5-billion Natural Resources Fund at J.P.Morgan, told Reuters yesterday that Gold "should have a sustained price level of over $1,200 an ounce before we see any significant new mine build.

"Gold mining is a very complicated and expensive business and you really need to see the Gold Price a lot higher before you see any increase in gold production."