CPM: Gold landscape radically altered

09 Aug

CPM Gold reportBy Dorothy Kosich –

RENO–(Mineweb.com) The “2005 Gold Survey” unveiled Tuesday by the New York-based CPM Group has concluded that several significant developments “have come together over the past year and a half to radically alter the gold landscape.”

CPM found that gold mine production and average cash costs will continue to increase, the price of gold will probably average $434/oz this year, and investor demand is the main engine driving gold markets.

Among the substantial developments affecting the gold landscape are reduced central banks and intergovernmental institutions gold sales, a major renaissance in the mining industry, and new markets developing in China as traditional gold markets are modernizing. CPM also cited other important events including the advent of the gold ETF, and increased institutional investor interest in gold and other commodities as an asset class.

The researchers suggest that the gold market will continue to be influenced by investment demand trends. “Investors today are more interested in holding some of their wealth in gold than they have been for most of the past several decades,” the study declared.

Nevertheless, CPM asserts that the key to future gold investment demand will be “whether economic, financial market, and political conditions will continue to provide a high enough degree of uncertainty and concern to keep investors interested in adding to their gold holdings.” CPM predicts that investors will purchase 42.5 million ounces of gold this year, a 5.2% increase over 2004, but 7.7 million ounces less than the record-breaking demand of 2003.

As an example, the study cited that the demand for physical gold, while strong during the first quarter of this year, cooled late in the second quarter. Nonetheless, CPM found that “more investors are willing to buy and gold more gold than before, and say they are willing and interested in doing this on a long-term, secular basis. This trend has added to buying by investors and the upward pressure on prices.”

“There are signs that the gold market may find a reduction in liquidity in the final four months of this year, which could add to the price of gold,” CPM added.

The study predicted that the price of gold will average $434 this year, a 5.9% increase than the $410.05 average price during 2004. If investment demand remains above historic norms, the study suggests that gold prices could keep within a $370-$470 range for 2005 and 2006.

In terms of strengthening investors’ desire for gold, the success of gold ETFs, which were introduced in Australia and London in 2003, and finally were approved this year for U.S. markets, have exceeded the expectations of their proponents. Four gold ETFs held an incredible 7,734,415 ounces of gold at the end of June 2005, which CPM called “an impressive beginning.” CPM had only forecast an initial gold ETF demand of 5 million ounces during the first year or two.

CPM said the ETF has attracted new investors to gold. Nevertheless, the study suggests the gold ETFs are really designed for “equity-oriented investors who would buy gold if they could buy and sell it as easily as they could shares, using the same brokers.”

Meanwhile, gold investors may also benefit from a dearth of central bank gold sales this year, which have already declined sharply, according to the study. “This year, very little gold remains to be sold,” CPM explained. “There were some heavy sales during the first quarter, the result of which is that full-year 2005 net official sales may be 13.8 million ounces, up 11.3% from the 2004 total.” Nonetheless, the study asserts that the flow of gold from central bank sales has already declined substantially.

In fact, CPM theorizes that longer term, net central bank sales may decline to around 6 to 8 million ounces a year, which is half of what has been coming into the markets on average on the past 15 years. “This reduction in physical gold sales by central banks should contribute to tighter physical markets, and exert some upward pressure on prices,” the study suggests. Among the central banks which have increased their gold reserves this year are Kazakhstan, Tajikistan, and Surinam. Meanwhile, Switzerland, the Netherlands, France, the Philippines, Sweden, El Salvador, the U.S., the United Kingdom, Nepal, Mexico, Argentina, Brazil and the European Central Bank all decreased their gold reserves this year.

CPM also suggests that the decline of the U.S. dollar from the beginning of 2002 to the start of 2005 has been a major factor in driving investment demand. However, the study asserts that the attraction to gold may be based more as an alternative based on the lack of a clear favorite among currencies. Gold’s role as a portfolio diversifier has also proved to be a major factor in stimulating investor interest in the past five years, according to CPM. The study also suggests that “inflation has not been much of an issue in stimulating investor demand for gold.”

MINE SUPPLY

However, investors and miners who are counting on mine output to continue its decline may be disappointed, as CPM asserts that “the effects of higher prices in stimulating gold mining activity may show up strongly.” Nevertheless, average mine production costs have shot up during the past three years, and now average $277 per ounce this year. However, CPM claims “there are many gold mining projects and deposits that offer attractive profit margins at prices above $400.” The study forecasts that gold mine production could rise 3% to nearly 64 million ounces, which reverses a five-year decline. However, increased mine production is projected to be only 2 million ounces this year, which may not be immediately apparent in the gold market.

Nevertheless, CPM notes that new reserves and new resources are being outlined around the world as mining companies spent more than $3.8 billion on exploration in 2004. Meanwhile, mine development programs that were rejected because projects were considered not economically feasible are now being resurrected along with old mines that are being reopened. The collective gross increase of these projects could add 15.3 million ounces of annual gold production capacity over the next five years, according to the study.

AngloGold Ashanti alone has eight major projects in its pipeline that will produce 15 million ounces of gold annually at a projected average cost of $186/oz. Interestingly, the study also notes that the largest declines in mine production in 2004 were in South Africa, Australia and Indonesia. CPM believes South African mine production will continue to decline this year, but at a lower rate than in 2004. Canadian gold production will remain consist, while Australia’s gold mine production is expected to increase 200,000 ounces this year to 8.5 million ounces.

Meanwhile, average cash production costs will continue to rise this year by as much as 10.6% to an average of $272/ounce, according to CPM forecasts.

This year alone, total gold supply, which includes 18 million ounces of trade between transitional economies and the international gold market, may rise 2.1% to 109.7 million ounces in 2005, according to CPM predictions. It will be the second-highest level of annual supply of newly refined gold in history, in their opinion. Their study projects that fabrication demand for gold, while flat last year, may increase1.9% this year to 81 million ounces.

The New York-based CPM group was founded in 1986 when the Commodities Research Group of Goldman Sacks was spun off from the investment bank.

To obtain more information regarding the CPM study, go to information regarding the CPM study, go to www.cpmgroup.com.

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