Gold - are we at the start of a new bull market?

Demand fundamentals are being driven by rebounding jewellery and bar hoarding.

LONDON - 

GFMS Ltd has released its first update to the 2007 Gold Survey and at the group's annual London seminar on September 13th, GFMS Chairman Philip Klapwijk outlined the group's conclusions with respect to supply and demand in the market during 2007. He also gave considerable attention to the role of the investor and the activity in external markets, which are covered in a separate article on this site.

The study concludes that the first half of the year saw gold experience over 200 tonnes of net disinvestment, driven by large-scale speculative offloading, but that we are now experiencing a sea change and that there will be a significant upswing in investor purchases over the rest of the year. Net disinvestment for the year as a whole is thus estimated at just 110 tonnes and the important conclusion is that we are now embarking on a new stage in the gold bull market.

Total fabrication demand (in tonnage terms) in the first half of the year rose by 12.3% over the first half of 2006, although it is important also to note that this, in the case of jewellery, was from a low base. Jewellery increased by 14%, driven particularly by a sparkling performance from India. Jewellery demand in the Indian Subcontinent increased by 178 tonnes or 29% over the first half of the year, aided by the fact that rupee prices of gold have been on a gentle downward trend for much of the year. GFMS is looking for a slight drop in Indian demand in the second half of the year by comparison with the first half of this year, but a slight increase from the levels registered in the second half of 2006.

Another star in the firmament is Turkey, which has formed the backbone of an 80 tonnes or 17% increase in first-half demand in the Middle East. It is also important to note that scrap recycling, which had been high in the Middle East in the first half of 2006, declined substantially in the first half of 2007. Fabrication demand increased in East Asia and the CIS, and was more or less flat in Oceania.

Fabrication in North America and Europe was slightly lower in the first half of this year, however, with falling jewellery fabrication accounting for the bulk of the decline in Europe. Much of this was driven by external competition from low cost rival fabricators, along with structural changes in consumption, tax disadvantages and the strength of the euro. Remember we are discussing fabrication here, not end-point consumption and therefore export competitiveness is an important component of the equation.

(In a separate presentation at the same seminar, GFMS Research Director Neil Meader gave a fascinating exposition on the changes in jewellery consumption in the western world, noting, inter alia, that gold jewellery in Europe has been sliding since the early 1990s and in the United States, during this decade. He commented that jewellery [all precious metals, not just gold] is facing competition from other luxuries, technological products, leisure and watches; and highlighted also the low level of promotional budgets, by comparison with other competing sectors, while pointing also to the emergence of competing materials within the jewellery sector, notably steel).

Meanwhile first half jewellery consumption in North America posted a double-digit fall, while fabrication and jewellery imports recorded year-on-year declines of 14% and 13% respectively. High and volatile prices and a volatile trading environment, similar to the conditions prevailing during 2006, were among the key reasons behind the decline.

Outside the jewellery sector, in which fabrication for the whole of 2007 is forecast to rise by 14%, fabrication is also strong, driven by continued expansion in the electronics sector.

Bar hoarding demand soared in the first half of the year, gaining almost 80%. A slowdown in the second half of the year suggests that for the year as a whole, global bar hoarding will increase this year by 32%. This too is from a low base, but one of the key features here is that the resale from Japanese investors is slowing.

Meanwhile the study also goes into its usual depth with respect to the supply side. We have noted above that scrap supplies have been reduced, due in part to the reduction in volatility in price. GFMS does not expect the current rally to be undermined by scrap resale as field research strongly suggests that prices would have to be substantially higher to tease out scrap sales. Much of the loosely held near-market supplies have already emerged, with, for example, much of the "tired, slow selling" western retail jewellery stocks having been melted down during 2006.

With respect to the official sector, GFMS is looking for small net purchases from non-signatories to the second Central Bank Gold Agreement, but that the 500-tonne CBGA quota may well come close to being filled this year. Mr. Klapwijk takes the view, however, that this is already factored into the price, noting the announcement during the summer from Switzerland of a resumption of sales (250 tonnes over an extended period) and news of fresh sales from the central bank of Spain. Net official sales were up by 4% in the first half of this year, but an acceleration in the second half is expected to lead to overall growth in sales of some 150 tonnes in 2007 against 2006..

One of the key conclusions from the study of the year to date is that the statistics underpin the anecdotal evidence that the market has gained a degree of price acceptance and that a floor of $670 is now feasible. It is important to note that buoyant fabrication and bar hoarding demand puts a solid floor below the market, but that investor demand would be responsible for further rallies.

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