Johannesburg - A drop in the supply of newly-mined gold plus the shelving of new projects because of the financial crisis will trigger a recovery in the gold price to above $1 000/ounce, according to Gold Fields CEO Nick Holland.
Interviewed after the group's quarterly results presentation in Johannesburg on Wednesday, Holland expressed his dismay at the recent under-performance of the gold price despite strong physical demand for the metal as shown by booming sales of coins and small bars.
One of the reasons being singled out by some commentators for gold's poor showing is manipulation of trading on the New York Comex market by heavy short sellers.
US commentator Gene Arensberg, writing for resourceinvestor.com said: "The futures markets have completely divorced from the physical markets for gold and silver as two or three US banks continued to savage those who would take the long side in futures.
"A few, very large players have taken advantage of a situation where too many speculators left the field of battle leaving the hedgers and short sellers with the superior advantage."
'Opaque markets'
Jeffrey Nichols, MD of American Precious Metals Advisors, said in a brief: "It is my firm conviction that gold loans to bullion banks in recent weeks and months have been an off-balance sheet tool utilised by some central banks to augment their efforts to provide liquidity to the banking system - since gold lent (placed on deposit) is sold for cash and typically reinvested in US Treasury bills or other securities by the bullion bank/gold dealer."
Holland would not accuse the central banks and bullion banks of these actions, but he would not rule them out either.
He said: "The derivative markets are opaque and you cannot prove that central banks and bullion banks are manipulating the gold price.
"I am not saying they are, but I must point out that central banks do have a vested interest in not allowing a runaway gold price. That is to protect their own currencies, particularly at a time of negative real interest rates."
Arensberg wants the gold producers to challenge the banks publicly over their actions. "Where are the industry champions? So far they hide, seemingly impotent, blind and mute. We should hear from them loudly and often," he said.
Arensberg's other suggestion is that buyers take physical delivery of gold from Comex instead of just trading the paper.
Holland said Gold Fields did interact with the central banks but it preferred to work through the World Gold Council.
Significant cash flow effect
He said he expected total world gold production to drop by around 5% this year, with South African output falling to about 210 tonnes. He believed there would another 5% fall in world gold production in 2009.
Holland pointed out there was just "no money available" any more to fund projects because of the way lending had dried up in the global financial crisis.
This had major cash flow implications for gold producers unable to source funds elsewhere.
He also pointed out the industry's average "all in? cost of producing an ounce of gold was estimated at about $800. This took into account capital expenditure, exploration and development costs that were excluded from the widely quoted "cash cost" of production.
"Australian and South African producers are starting to see some benefits from the weakening of their respective currencies against the dollar but the bulk of the world?s gold is produced from 'dollarised' countries," he said.
Holland also believed that the recent strength of the US dollar had been overdone and that the currency "had to weaken again".
- Miningmx.com
For more mining sector coverage, visit miningmx.com.