DJ INTERVIEW: Gold Supply Under Pressure - Merrill Fund Mgr
Wednesday November 10, 4:28 PM
INTERVIEW: Gold Supply Under Pressure - Merrill Fund Mgr SYDNEY (Dow Jones)--Merrill Lynch Investment Managers have a favorable outlook for gold, underpinned primarily by emerging pressures on supply, a leading member of the firm's London-based natural resources team said late Tuesday.
Amid "relatively static" demand, falling mine output over the coming years and the potential for a reduction in European central bank sales stand to prolong the rally in U.S. dollar gold prices, Merrill gold fund manager Evy Hambro explained during a visit to Sydney.
"We are definitely in a positive environment...and that's going to remain until the fundamentals deteriorate, and we don't see that changing," Hambro said on the sidelines of a presentation to financial advisers.
Spot gold reached a 16-year high of US$436.85 a troy ounce Tuesday. At 0700 GMT, it was quoted at US$433.88/oz.
Hambro's seven-member team is one of the world's largest managers of gold equity investments, overseeing about US$6.5 billion spread between several mining funds.
Strong currencies in many of the leading gold-producing countries are actually forcing production cuts, despite the high U.S. dollar gold price, Hambro explained.
"We've got a situation where the mined production of gold is going to be declining for the foreseeable future," he said.
According to London-based precious metals market consultant GFMS Ltd., global mine production in 2003 remained flat about 2,590 tons.
While there are pockets of new supply emerging in countries like Russia and China, Hambro said global output will inevitably suffer from a lack of exploration.
"One of the big changes in the mining sector as a whole has been a significant cut (in) exploration expenditure, which is obviously reducing the probability of finding new projects to exploit," he explained.
Thus, gold reserves are increasingly being mined at a faster rate than they are being replaced, Hambro said.
"For example, (Newmont Mining Corp.) has to find seven million ounces of gold a year just to stand still; in order to grow, they've got to (increase reserves) more than that," he said of the world's largest producer.
The same is true of other top producers, such as South Africa's AngloGold Ashanti Ltd. (AU), Hambro said.
"You don't find seven million ounce gold mines every day," he said.
Prospect Of Falling Central Bank Sales "Very, Very Exciting"
A less certain, but nonetheless bullish, component of Hambro's views on gold supply is the uncertainty surrounding European central bank sales.
Early this year, 15 European central banks renewed their five-year-old gold sales accord, known as the Washington Agreement, for a further five years.
Under the terms of the original deal, which expired in September, the signatories agreed to limit aggregate sales to 400 tons a year, or a total of 2,000 tons over the life of the accord.
While the extension raised the annual cap to 500 tons,this is "still well within the amount the market can tolerate," Hambro said.
But the growing prospect that total sales will fall below the 2,500 ton five-year cap, possibly by a wide margin, represents significant upside potential for gold, he noted.
"The question mark surrounding this agreement is who is actually going to sell the gold, and this is what is posing the big opportunity in the market today," Hambro said.
Large sellers under the first deal, including the Swiss central bank and the Bank of England, are likely to all but stand aside this time, according to analysts.
"The original speculation focused on the Germans, the French and the Italians," Hambro said, referring to possible major sellers under the new agreement.
Initially, government officials from the aforementioned countries were widely believed to be in favor of liquidating large chunks of their bullion reserves to balance their budgets and retire debt.
But in recent months, disagreements between government officials and central bankers, surrounding the mechanics and legal aspects of deploying the proceeds from gold sales, have diminished the likelihood of large sales by France and Germany.
"And the Italians have come out... and said they're not going to sell their gold at all and have no plans to do so," Hambro said.
The market is thus currently trying to figure out who might actually sell bullion, and musing over the possibility that total sales might fall well short of the 2,500 ton limit, Hambro explained.
"If gold is not sold under this agreement, then the market will be very, very exciting for a number of years to come," he said. "The market could not tolerate an absence of supply to this degree without prices having to rise."
