Gold: trends of the month

In August – September the prices for gold reached their peak in this year breaking the psychological limit of $700 per ounce. The last year record ($735 per ounce) has not yet been beaten but it appears very probable.
On August 15, the World Gold Council published gold market statistics for the first six months of 2007.

In physical terms, the world demand for gold went up by 11% reaching 1 780 tons compared with the last year, but the gold supply to the market went down compared with the figures for the similar period last year by 4% dropping to 1 664 tons. The demand was boosted by the jewellery industry, which increased its consumption by 21% up to 1 272 tons (in terms of money, by 36% up to $26.213 billion). This high indicator, according to analysts, was due to the last year situation when jewellers were waiting for the end of price rally and kept working using their stocks bought before the price rise. This year their stocks ran dry but the prices for gold flattened out. However, the average price indicator exceeded that of the year past by 6%.

In terms of money, the demand for gold in the first six months rose by 24% and reached $36.948 billion. There was a marked increase in demand for gold from the already active players in the market of precious metals: China, India, Turkey and Middle Eastern countries.

The gold output grew by 3% up to 1 208 tons, mainly due to launching new projects in Australia, Canada and Asia.
India is standing out among the active gold consumers. The figures for April – June 2007 show that this country’s demand for gold doubled: from 166.4 tons up to 317 tons. Experts explain this aggravation of “gold fever” by strengthened national currency, dropped world prices and continuous wanton growth of national economy.
According to the report of the World Gold Council, India, outstripping any other Asian country by the number of billionaires living side by side with an enormous army of poverty-stricken people, is gradually turning into a largest separate market of “yellow metal”. It should be noted that Indians are not only buying jewels but consider gold as an instrument of financial investments. However, so far gold finery stays out of competition: its demand has leaped by 89% to a record level of 240 tons. It appears that in autumn the demand will only surge, since the country is anticipating traditional autumn festivities, which are traditionally noted for a high demand for jewellery.
Gold producers focused their attention on China, which, according to forecasts, may seize the leadership in mining the noble metal in the coming five years.

Last year the People’s Republic of China occupied the third place in the list of largest world gold producers (according to other figures, the third place was occupied by Russia) and its gold production grew by more than 15% in the first six months of the year. Experts believe that if China will manage to preserve such pace in gold mining it may soon outperform the current leaders – the USA and South Africa.
The increased world and domestic demand for precious metals remains to be the basic reason propelling gold production growth in China. According to the World Gold Council, China is already in the third place in the world by its gold consumption, but its demand for this precious metal is rapidly moving uphill. From the start of this year, the gold demand in the territory of the People’s Republic of China went up by 44%, said Matthew Graydon of WGC to the RBC news agency.

Commentators note a stable growth of demand for gold from all ranks of buyers including investors, speculators, the jewellery industry and its end-buyers. The investment funds, which deemed the price level settled after the August correction to be attractive to open new long positions, were the immediate driving force behind this upsweep. According to the estimates of Paul McLeod, Commerzbank Vice-President for Precious Metals Market, the investment funds are getting ever more interested. Technical analysts name the $720 mark per troy ounce as the next target price.

The Union of Gold Producers of Russia confirmed its forecast for the current year saying the gold production will drop by 2 tons as compared with 2006 when they mined 147.619 tons of gold.
During the seven months of the current year, the plants received 76.86 tons of gold for processing, down by 1.9% as compared with the similar period last year. The total figure includes 66.69 tons of gold extracted by subsoil users, which is less by 3.19% than in the year past or by 2.196 tons. This prompted Valery Braiko, Chairman of the Union of Gold Producers and Member of the Board of Directors of OAO Polyus Zoloto, to confirm the forecast of his union in respect of a possible gold production decrease in 2007. According to this businessperson, “in some areas the situation looks a bit better and in others it is a bit worse than planned. The Amur Mining Partnership is working worse, than it was planned, Rusdragmet is working worse than it was planned, and even Polyus Zoloto is unfortunately working below its scheduled targets.” The union top manager noted that “every year subsoil users spend more to develop alluvial deposits and their mining efficiency is going down.” According to Valery Braiko, “the state will not put even a nickel into geological prospecting of alluvial deposits. Never. To put it otherwise, the fate of those working on such deposits is clear – unfortunately, there will be further contraction of output and that of the number of companies developing alluvial deposits.”

For the first time, the semestral report of the World Gold Council furnished the data about jewellery consumer demand in Russia. As it turned out, Russia occupies the seventh place in the world in terms of jewellery sales. It should be noted that almost 70% of its market demand are met by domestic manufacturers. In 2006, the Russian jewellery market consumed 70 tons of gold and almost 50 tons in the first six months of this year. Only in its second quarter, jewellers bought by 27% more gold bringing the amount to 20.3 tons. This means that gold consumption on the part of Russian jewellery industry alone may exceed the supply offered by producers: in the first half year, they mined and turned to affinage just 55.1 tons of gold.

The Yakutia administration, for example, monitored that the target for jewellery production was met only to 91.8% due to the closed workshop of OOO Dragotsennosti Yakutii in Nyurba. The situation is aggravating at the Kuranah Jewellery Plant, which fulfilled its production schedule for mere 36.3%. As compared with the last year, the drop exceeded 86%. Despite the measures being taken, the plant is experiencing serious difficulties due to suspended supply of raw materials from the parent enterprise, which stopped production of precious metals. Having modern equipment, the plant is processing its remaining silver stocks and stays on the brink of a shutdown. The Ministry of Economic Development of the Republic, according to its top executive Alexei Struchkov, is currently tackling the problem trying to reactivate the Kuranah Jewellery Plant owned by OAO Aldanzoloto.

As reported by PRIME-TASS, 15 subsoil user enterprises in the Republic of Sakha have not so far been able to start their works on gold deposits despite their license agreements. Alexei Struchkov says that “it has been decided to withdraw licenses from those enterprises, which will not be able to start their operation till the end of this year.”
Curious enough are the figures disclosed by Kostromastat, a statistic agency, which summarized social and economic indicators in the Kostroma Region for the first six months of 2007. The indicators related to business activities of local companies do not look very optimistic. According to the statistics, for the first of June, 46% of all enterprises in the area incurred losses. From the start of the year, the overdue accounts payable to customers averagely increased by 0.2 percent every month (while in January – May 2006 this figure used to decrease by 2.9%). It should be stressed that jewellery producers were among companies bearing the main burden of debts.