14 de noviembre de 2014 / 5:43 / en 3 años

COLUMN-Falling gold supply a rare beacon of hope for price recovery: Russell

--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Nov 14 (Reuters) - It must be getting increasingly hard for the World Gold Council to find something positive to focus on when compiling its quarterly report.

The latest instalment, released on Thursday, is no exception and the council, which represents gold producers, chose to highlight what it termed the “good health” of the market for jewellery.

This was despite a drop in jewellery demand of 4 percent year-on-year in the third quarter, but maybe it looks better than highlighting the fact that overall gold demand fell to the lowest level in nearly five years.

However, instead of focusing on the demand side of the gold equation, if the council was looking for some better news on the outlook for the precious metal, the supply side offers some hope.

It’s becoming a more common theme in commodities this year, namely that supply-side dynamics are driving markets far more than demand, but many in the market have been slow to adjust to this.

Witness iron ore and coal, where much of the commentary is about the state of demand in China, while less is said of the massive boost to supply in recent years of these commodities, which has driven prices down to five-year lows.

But unlike those markets, where the oversupply is chronic and structural, gold supply is far more responsive to price signals and some is already starting to leave the market.

Total supply was 1,047.5 tonnes in the third quarter, a drop of 7 percent from the same quarter last year.

The first three quarters of 2014 saw supply of about 3,147 tonnes, which puts the whole year on track to come out at about 4,196 tonnes.

If that is the case, it means supply in 2014 will be 1.4 percent lower than in 2013 and about 6 percent below the level of 2012.

So far, much of the reduction in supply has been from recycled gold, which dropped 25 percent in the third quarter to 250.5 tonnes from 333.7 tonnes in the same quarter last year.

That is to be expected, given the sharp decline in the price last year and the lack of a recovery this year.

Spot gold ended Thursday at $1,161.58 an ounce, down 3.6 percent from the start of the year and 39 percent below the all-time high of $1,920.30 in September 2011.


More importantly, as this is probably the most positive factor for a gold price recovery, the council’s third-quarter report showed mine supply was starting to leave the market as well.

Total mine supply was 797 tonnes in the third quarter, flat from the same period last year but down 1.8 percent from the second quarter.

The council expects total mine supply to be roughly the same this year as in 2013, which actually is positive for the price, given that mining capacity expanded in recent years in response to the decade-long bull run that ended in 2011.

The chances of more capacity being brought online in the coming years is rapidly diminishing as the economics of building a new mine and associated processing equipment don’t stack up at current prices.

The delay of Polyus Gold’s Natalka project in Russia means output in the world’s fourth-largest producer is likely to fall in the next three years, Sergei Kashuba, the head of the Gold Industrialists’ Union, told Reuters on Nov. 13.

It’s also likely that high-cost producers may have to curb or idle output, especially given the likelihood that gold prices will remain depressed for some time to come.

Research published by Barclays on Sept. 19 showed that 10 percent of all global output is loss-making when a broad definition of costs is taken into account, on what it calls an all-in sustaining costs measure.

The highest-cost producers on an average basis were in Peru, followed by Mali and South Africa, the research showed.

While miners will be actively trying to lower their unit costs of production, the longer prices remain below $1,200, the more likely it becomes that some will be forced to shut down or stop mining less productive seams.

Putting a gold mine on care and maintenance is comparatively easier and cheaper than doing the same thing for a coal mine, meaning it’s likely that unprofitable supply will leave the market at a faster rate than has been seen in coal.

The reduction in supply is a slow-burn issue, meaning that it won’t provide an immediate boost to prices. But it does present one of the few bright spots for the yellow metal.

Editing by Alan Raybould

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