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Central banks and investors weigh in as gold market transforms
By Javier Blas
Financial Times, London
Tuesday, August 17, 2010
http://www.ft.com/cms/s/0/d627df3c-a9e7-11df-8eb1-00144feabdc0.html
The global gold market has been transformed over the past decade. Jewellery, for decades the backbone of gold consumption, has moved to the sidelines amid voracious demand from investors. Central banks, for years big sellers of bullion, have performed a radical U-turn and started to buy.
These changes help explain the surge in gold prices to a nominal all-time high of more than $1,200 a troy ounce earlier this year, from roughly $250 an ounce in 2000. Adjusted for inflation, however, prices are still far from their all-time high above $2,300 an ounce, reached in 1980 during the Soviet invasion of Afghanistan and the oil crisis.
The arrival, en masse, of investors -- particularly buyers of physical gold through bullion-backed exchange traded funds -- is the more important of these shifts in the gold market. The popular SPDR Gold Shares, the world's largest gold ETF, holds more than 1,280 tonnes of bullion, more than most central banks.
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Sona Resources Expects Positive Cash Flow from Blackdome,
Plans Aggressive Exploration of Elizabeth Gold Property
On May 18, 2010, Sona Resources Corp. (TSXV: SYS, Frankfurt: QS7) announced the release of a preliminary economic assessment for gold production at its flagship Blackdome and Elizabeth properties in British Columbia.
Sona Executive Chairman Nick Ferris says: "We view this as a baseline scenario for gold production. The project is highly sensitive to the price of gold. A conservative valuation of gold at $1,093 per ounce would result in a pre-tax cash flow of $54 million. The assessment indicates that underground mining at the two sites would recover 183,600 ounces of gold and 62,500 ounces of silver. Permitting and infrastructure are already in place for processing ore at the Blackdome mill, with a 200-tonne per day throughput over an eight-year mine life. Our near-term goal is to continue aggressive exploration at Elizabeth and develop a million-plus-ounce gold resource, commencing production in 2013."
For complete information on Sona Resources Corp. please visit: www.SonaResources.com
The buying spree meant that investors last year purchased more gold than buyers of jewellery for the first time in three decades, highlighting the growing impact of speculators on bullion prices.
However, some analysts believe the fact investors are buying more gold than the jewellery industry is a sign of a bubble.
GFMS, the consultancy that compiles benchmark supply-and-demand data on the precious metal, said earlier this year that investment demand doubled to 1,820 tonnes in 2009, while jewellery purchases fell by 23 per cent to 1,687 tonnes, a 21-year low.
Philip Klapwijk, executive chairman of GFMS, earlier this year warned that investors were likely to buy more gold again this year, but added that the bullion market could become vulnerable to a correction over the medium term if investors turned to other asset classes.
"As the macroeconomic environment gradually normalises, the gold market's dependence on investment will become all too apparent with a substantial price retreat at that point on the cards," Mr Klapwijk said.
Gold traders, jewellery industry executives, and bankers believe gold prices have to fall toward $1,000 an ounce to witness noticeable purchases from the jewellery industry. However, they note that some buying could emerge at $1,100 an ounce.
According to GFMS, gold jewellery demand has fallen by a third from a peak of 3,294 tonnes in 1997, when gold was trading below $500 an ounce.
The other big change in the market has been the role of central banks. For two decades, these banks were net sellers of gold, but that trend has reversed as banks in Europe scale down their sales and others, such as those in China, India, and Russia, make significant purchases.
The clearest example was India's decision last year to buy 200 tonnes of the International Monetary Fund’s gold, following Beijing's announcement that it had almost doubled its gold reserves to become the world's fifth-biggest holder of the metal. Central banks in countries including Russia, Venezuela, Mexico, and the Philippines are also buying gold, albeit in small amounts.
The shift is important for the gold market on two fronts: The fresh interest provides psychological support and, more importantly, slower sales reduce sources of supply. Last year central banks sold 246 tonnes. Although this was the lowest amount in 10 years, it was equivalent to 10 per cent of global mined gold.
Suki Cooper, a precious-metals analyst at Barclays Capital in London, believes central banks could be net buyers of bullion this year, the first time in more than 15 years. That view is widely shared on the market. But analysts are not expecting central banks to purchase any significant amount of gold on a net basis over the next few years, making a repetition of the buying spree of the 1960s seem unlikely.
Even so, the more positive trend towards gold was highlighted recently by UBS, the Swiss bank, in its annual poll of central bank and sovereign wealth funds. It found nearly a quarter of central banks believed gold would become the most important reserve asset in the next 25 years.
At its annual seminar for sovereign institutions, UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000 billion in assets. The results were not weighted for assets under management.
Asked what the most important reserve asset would be in 25 years, roughly half of polled officials chose the US dollar, but 22 per cent pointed to gold. Bullion was the second most popular response, well above others such as Asian currencies or the euro.
Analysts also said Asia’s central banks, from India to the Philippines, were the most likely to buy gold. They added that central banks and, crucially, sovereign wealth funds in the Middle East were also keen on the metal, although some bankers pointed out that sovereign wealth funds were more likely to be tactical buyers, seeking price appreciation, rather than strategic buyers seeking diversification and long-term security.
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Prophecy to Become Coal Producer This Year
with 1.5 Billion Tonnes of Resource
Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen.
For Prophecy's complete press release about its production plans, please visit:
http://www.prophecyresource.com/news_2010_may11.php
