Structural deficit in gold supply could send prices higher
Wellington West Capital Markets analysts suggest that investors
“revisit investing in the junior and intermediate gold producers.”
Author: Dorothy Kosich
27 November 2008
Based on the assumption that current strong physical gold demand highlights
an existing supply deficit, Toronto's Wellington West Capital Markets
forecasts that, "if the increased structural deficit in gold supply
continues, gold prices should adjust higher."
Wellington metals analysts also advised, "Given the potential change in
market fundamentals, we believe it is time investors revisit investing in
the junior and intermediate gold producers."
The analysts said their data indicates that a Central Bank Gold Agreement (CBGA)
signatory "has become a gold buyer, putting further pressure on the existing
supply deficit in the bullion market." In their analysis, Wellington
suggests that China is building a strategic gold reserve.
Meanwhile, possible Russian, Ecuadorian and Iranian gold liquidation in the
face of internal credit woes "has not fazed the market," the analysts
advised.
Analysts Catherine Gignac, Paolo Lostritto, John Miniotis, and Ryan Walker
also noted that investment demand for physical gold increased by 179% in the
third quarter of this year.
"Severe stock shortages of bars and coins were reported among bullion
dealers in many parts of the world. A continuation of strong gold investment
demand has been seen so far in Q4/08, leading to the Perth Mint being forced
to suspend orders until January," they said.
Wellington also urged precious metals investors, who "are expected to
initially focus on large, capitalized liquid producers" to consider coming
down the food chain. "If the market starts to regain confidence and applies
higher future gold prices, we would expect more speculative funds to invest
in intermediate and junior gold producers."
"Funds should continue to focus on well-managed senior producers but we
believe it prudent to start considering the junior and intermediate gold
space," the analysts advised.
In their research for the third quarter of this year, Wellington's analysis
found that, despite a 19% increase in gold average gold price, gold mining
production fell 2%, costs rose 37%, and margins declined by 13%, resulting
in operating cash flows declining an average 29% for the group. "We note
that debt levels are rising for most of the companies, in comparison to
previous years when equity financing was more common."
The analysts also discovered that the relationship with the price of gold
relative to the price of oil began to break down in October, resulting in
the price of gold only decreasing by 8.1% since the end of September while
the price of WTI crude oil decreased 51%.
From www.mineweb.co.za