Demand seen as hedge against possible depreciation of dollar: Abare

M.R. Subramani

Uptrend


Global gold

mine production in 2007 is expected to increase 3 per cent to 2,587 tonnes.

Global fabrication

demand is expected to increase 4 per cent to 3,029 tonnes.

Chennai, Dec. 31

Gold prices in 2007 are forecast to average $670 an ounce, 11 per cent higher than the estimated 2006 average of $606, mainly on ongoing strength in investment demand.

Australia's independent government economic research agency Abare, in its commodities outlook, has said uncertainty over the outlook for short-term interest rates in the US and the consequent implications for the dollar is expected to support the investment demand for the yellow metal.

The demand of gold is seen as a hedge against a possible depreciation of the dollar.

"In addition, investment demand for gold is also expected to be supported by geopolitical uncertainty and the ongoing possibility of terrorist activity," it said.

Pointing out to the growing number of "exchange-traded funds" and increasing ease of investing in gold, Abare said the combined holdings of nine global exchange-trade funds in November last was over 600 tonnes, up over 200 tonnes since the beginning of 2006.

Rise in mine output

Global gold mine production in 2007 is expected to increase 3 per cent to 2,587 tonnes on higher production in Australia, the US and Latin America. This rise will offset further decline in South African production, according to the research body.

Newmont's Leeville and Phoenix mines in the US had commenced commercial production in the final quarter of 2006 and the output would be further ramped up in 2007.

Also, Barrick Gold's Ruby Hill project in the US was set to commence production in early 2007, Abare said.

During 2006, South African production was estimated to have declined by seven per cent to 276 tonnes compared with a 14 per cent in 2005. In 2007, the production could decline further by three per cent to 268 tonnes.

Fabrication demand

In the first three quarters of 2006, gold fabrication demand declined substantially. This was mainly due to fall in jewellery demand in India, which accounted for 23 per cent of the global gold jewellery purchase in 2005 and West Asia.

However, in 2007 global fabrication demand was expected to increase four per cent to 3,029 tonnes on recovery in gold jewellery demand in India, West Asia and China.

This is in view of an anticipated rise in household disposable incomes.

Official sector sales

Official sector sales in 2006 declined 44 per cent to 365 tonnes, which reflected a dip in gold sales by central banks in various nations that had signed the Central Bank Gold or the Washington Agreement.

In the second year of the agreement between September 2005 and August 2006, the signatories sold only 395 tonnes against the annual limit of 500 tonnes.

In 2007, the official sector sales are seen largely unchanged and again, the sales may not meet the targeted 500 tonnes, according to Abare.

The Washington Agreement was signed by the Central Banks as an effort to ensure that gold prices do not decline alarmingly due to sales of the yellow metal by them from the reserves.

De-Hedging

In the first three quarters of 2006, gold producers reduced their outstanding hedge position by 357 tonnes. For the entire year, the projected dehedging has been put at 400 tonnes. This could be further reduced by 200 tonnes in 2007. However, Abare has a caution.

"While major global mining companies are expected to continue to favour dehedging in the short-term, their ability to do so will be constrained by the reduced size of the remaining outstanding global hedge position," it said.

(This article was published in the Business Line print edition dated January 1, 2007)
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