The Hindu Business Line : Bullish outlook for gold may not be sustainable

THE Gold Survey 2004 released recently by the London-based consultancy, GFMS Ltd, has forecast the possibility of a rise in the yellow metal price to $450 an ounce subject to further investor interest.

However, considering that gold is currently struggling to withstand long liquidation and climb back above $400/oz and also the demand-supply fundamentals — physical supplies were some 900 tonnes more than physical demand in 2003 — whether the yellow metal has such a strong upside is open to question. While admitting that gold price entirely depends on investment, the survey had not attempted to quantify it, but simply assumed investment to be the residual of demand and supply balance, said Mr Kamal Naqvi, precious metals analyst with Barclays Capital.

According to the analyst, gold supplies in 2003 were 4,142 tonnes, accounted broadly by mine production of 2,593 tonnes (previous year 2,590 tonnes), official sector sales of 606 tonnes (545 tonnes) and old gold scrap 943 tonnes (836 tonnes).

Demand, on the other hand, was 3,232 tonnes comprising the main jewellery estimated at 2,533 tonnes (2,680 tonnes), other fabrication at 516 tonnes (482 tonnes) and bar hoarding at 183 tonnes (250 tonnes).

After accounting for net producer hedging of 310 tonnes (437 tonnes), the implied physical balance came to 600 tonnes. The entire quantity of implied physical balance is assumed to be investment by GFMS; but it may not really be the case.

Regardless of how to quantify the investment, the largest threat to gold prices is the reversal of sentiment from the largely short-term investors. In the face of current trends of resilient mine output and rising supplies from scrap and the official sector; and against weak physical demand, the bullish outlook for gold as projected by GFMS may not be sustainable, it is believed.

Commenting on Indian demand for gold, Mr Naqvi said: "We are wary of the reported increase in Indian demand as scrap sales increased by 20 tonnes to 132 tonnes, suggesting that net demand for fresh gold was flat to slightly lower on the year. This is in line with trade although gross Indian bullion imports rose by 36 tonnes to 540 tonnes."