Daily Equity Report

Gold continues its steady march

Gold in US dollar terms is trading at new highs. This appears to be a function of both dollar weakness and a general demand for bullion itself. Bullion touched a high of $1132.95/oz. It fell back slightly and is trading at $1130/oz.

The rand firmed against the dollar, but the stronger bullion price helped moved gold shares up 2,46% on the day.

Some positive factors for gold generally include:

India Central Bank purchased 200 tons of gold for $6,7 billion at the beginning of the month from the IMF. While this had no impact on newly mined gold – i.e. just a transfer of ownership between one long term holder and another long term holder, the trade seemed to have an impact on the price.

The trade seemed to be a signal to the market that central banks, for many years net sellers of their gold hoard, have started tuning net buyers.

The average price paid was in the order of $1045/oz. At current spot this trade has seen an increase of some 8% in a couple of weeks.

Having peaked in 1980 in nominal terms, the price of gold fell to $280 at the end of 1999. Central bankers at that stage signed a 5 year agreement restricting their total sales to 400 tons annually. This agreement, originally known as the Washington accord, was resigned in 2004, restricting sales to 450 tons per annum. The third central bank gold agreement was signed in August this year, limiting sales to 400 tons per annum. The IMF was not a signatory to this agreement.

It is estimated that gold in storage above ground is in the region of 160 000 tons. Annual mined gold is in the order of only 2500 tons per annum. The vast supply of above ground tonnage compared to the newly mined gold has meant that investors have placed a high weighting on central bank activity, rather than annual demand and supply.

Looking back 10 years when central banks started to divest from their gold holdings and increase their foreign exchange exposure, it’s clear that their timing could hardly have been worse. A price of $300/oz has compounded at 14% per annum in dollar terms to its current price.

Because the natural annual off take exceeds annual supply of new gold, a swing in central bank activity may have a geared impact on the price.

Gold price