JM&B Monthly Gold & Silver Report August 2005 www.johnson-matthey.ch Introduction The purpose of this report is to comment on developments in the gold and silver markets on a monthly basis. For more information about this report, please consult the Appendix. Johnson Matthey plc issues reports on platinum group metals: http://www.platinum.matthey.com/publications/price_reports.html Contents 1. Overview 2. Gold 2.1 News and Fundamental Considerations 2.2 Technical Comments 3. Silver 3.1 News and Fundamental Considerations 3.2 Technical Comments Appendix More about this report 1. Overview August provided yet another month of price consolidation for both gold and silver, albeit in a higher price range for gold and a lower price range for silver. 2. Gold 2.1 News and Fundamental Considerations Selected News Items from the Month Supply and Demand London, 11 th August 2005, (Mitsui) The Hedge Impact of global gold hedging was cut by 2.5 Moz in Q2 05, a sharply larger decline than seen in Q1 05. This took the Hedge Impact of the global book to 53.1 Moz, 48% lower than its peak of Q3 01. In terms of committed ounces the decline was a larger 2.8 Moz, taking that measure of hedging to 56.4 Moz.
Despite the quarterly increase in dehedging it the hedge book continues to decline at lower levels than seen in 2004, when the decline averaged 3.6 Moz a quarter, suggesting the slowing trend remains intact. The dehedging was broadly-based, with the largest four hedgers, AngloGold Ashanti, Barrick, Placer Dome and Newcrest, accounting for 55% of the dehedging, compared with their 70% share of the global hedge book. Of 101 companies in our survey, 60 have hedge commitments and 45 of those reduced their hedges, an unusually high total. The Hedge Impact measure fell less than the committed measure because of the impact of the higher gold price, not just in US dollars but also in South African rand and Australian dollars. This increases the likelihood of call options being exercised, and thus slowing the decline in the Hedge Impact of the global book. In terms of product mix, the largest decline came in the net forwards, down 1.5 Moz, though in percentage terms this was a fall of just 3%. The Hedge Impact of the net puts, down 0.4 Moz, was 48% lower than in Q1 05, reflecting the impact of higher gold prices as noted above. Regionally, the major decline was in our largest hedging region, the Americas, where the Hedge Impact was down 1.5 Moz; its largest decline since Q2 04. The African hedge book s Hedge Impact fell 0.4 Moz, while Australia s saw a decline of 0.6 Moz. In terms of months production committed Australia remains easily the most hedged region though it fell to 26 months of production, from 27 in Q1 05. Our Australian region contained all four companies in this quarter s Hedge Book which increased their hedge commitments. However only Oceana Gold s was up significantly, rising 0.1 Moz. The largest reduction was made by AngloGold Ashanti, 0.6 Moz on the committed ounces measure. This was 19% of the global reduction. Seven other companies cut their hedges by more than 0.1 Moz. Five companies reduced their hedge commitments to zero; within this group Giants Reef Mining and Northern Gold were the largest in terms of ounces. The mark-to-market value of the global book was a negative $5.3bn, $0.1bn better than a revised Q1 05's negative $5.4bn. This is a slightly smaller improvement (2%) than one would expect from the reduction in the size of the global hedge book (4%), mainly due to higher gold prices. Looking ahead delivery profiles and public statements from mining companies suggest we can expect an average 2.3 Moz a quarter of dehedging over the next six quarters. This is clearly slower than we have been used to but still represents a substantial amount. However this estimate does not take into account one-off events, new project-related hedging and any changes in sentiment. More here: www.thebulliondesk.com/content/reports/tbd/vm/thbq205.pdf
India Mumbai, 29 th August 2005, (Reuters) Gold demand in India, the world's largest consumer of the yellow metal, will remain strong this year because of higher incomes, strong festive purchases and good farm output, the World Gold Council said on Monday. The demand, excluding recycled gold, rose 17.6 percent to 643 tonnes in 2004 from 547 tonnes in the previous year. It surged 72 percent to 243 tonnes in the first quarter of this year to March. "Barring any major volatility and dramatic changes in gold prices, the signals are that the demand for gold is going to remain strong this year," said Sanjeev Agarwal, managing director for the Indian subcontinent at the industry-funded council. World gold prices are now quoted at about $440 an ounce, up 19 percent from a year earlier. "The first half of the year has been quite good and the second half is the main festive buying period. Based on the numbers and gold imports, it looks that the last year's growth rate will be sustainable." Incomes were rising in the country with rapid economic growth and a strong stock market performance, Agarwal told Reuters in an interview. India's economy, Asia's third largest, is expected to grow 7 percent in the fiscal year to next March, marginally faster than 6.9 percent growth last year. "The stock market is burning. And when people see a strong growth in the stock market, they start cashing in some of their profits and putting the money into alternative investments, gold being one of them," Agarwal said. India's main stock index hit an all-time high this month, helped by robust foreign fund investment. Rural Demand Agarwal said monsoon rains in most parts of the country had been quite good this year and India was expected to have reasonably good agricultural growth. Rural India accounts for about twothirds of Indian gold demand. Investment demand in India was expected to rise in the coming years with the launch of new products such as exchange-traded funds for gold, gold trading by commodity exchanges and retail sale of gold bars and coins by banks, he said. The share of investment demand in the country of more than 1 billion people could rise to 18 percent of India's total gold demand in the next five years from about 15 percent now. Jewellery and coins account for the rest. "As these products grow, people will look at these new investment vehicles," Agarwal said.
Agarwal said gold jewellery had been facing competition with consumer goods but gold demand in absolute terms would keep on increasing because of rising incomes. "Income levels are rising and with that, there is a shift from the lower to the middle income groups," he said. "Core middle-class households will really drive gold consumption." Gold jewellery forms an important part of Hindu marriages, as parents gift their daughters the metal for financial security. Hindus consider gold an auspicious metal and like to buy or gift it during religious festivals. "The cultural connect, the emotional connect, the financial security and the auspiciousness, all these four pillars of association with gold are so strong in India that they will continue to remain drivers for gold demand." 2.2 Technical Comments Long Term Technical Comments Gold consolidated in a higher price range in August: Daily/Weekly Technical Comments London afternoon fix in USD/oz: Open High Low Close 431.65 447.25 430.65 433.25 1 st August 12 th August 30 th August 31 st August
London afternoon fix in /oz: Open High Low Close 353.18 361.32 351.22 353.67 1 st August 18 th August 9 th August 31 st August Gold made both higher USD/oz and /oz highs and lows in August compared to July. Resistance at around 446 USD/oz proved too strong in the middle of the month and as the USD strengthened, the USD gold price corrected. At the time of writing, the daily chart appears to be indicating that the gold price is turning up.
3. Silver 3.1 News and Fundamental Considerations Washington D.C., 8 th August 2005, (Silver Institute) President George W. Bush today signed the wide-ranging Energy Policy Act of 2005, which while addressing U.S. energy needs, creates a research program for the use of precious metals, including silver, in industrial and automotive catalysis. This federally authorized research may lead to new developments in catalysis for silver to replace or to augment traditional catalysts, which have relied on expensive platinum-group metals in applications, including catalytic converters for automobiles. The precious metals provision is one aspect of a comprehensive federal program to conduct research and development in catalysis science. "We look forward to working with the Department of Energy on this research program," stated Michael DiRienzo, the Executive Director of the Silver Institute. New York, 30 th August 2005, (CPM Group) Silver prices averaged $7.09 in the first seven months of this year, 9.2% higher than in the same period last year. Prices have risen sharply, from annual average price of $4.38 - $4.90 in 2001 2003 to $6.70 in 2004. The 2005 edition of CPM Group s Silver Survey concludes that the silver price increases over the past few years reflects a longer-term shift into a higher trading range, a development that many silver market observers had been expecting in recent years. A combination of strong investment demand for silver, still strong overall fabrication demand, and tightening supplies and inventories are identified in the report s analysis as the root causes for the increase in prices. The 189-page report presents the results of CPM Group s extensive analysis of silver supply and demand trends. It discusses recent declines in silver use in photography, jewellery, and silverware. Silver use in photography is declining, as consumers shift to digital imaging, although the decrease in silver use in this industry has not been as great as many market observers suggest. This is because silver use has been stronger in some segments of the photographic market, such as commercial photographic papers, X-rays films, and motion picture films, than it has in conventional commercial films. Silver use in jewellery and silverware meanwhile has declined due to the rise in silver prices, since these two applications are the most price-sensitive segments of demand. The Silver Survey notes that demand in other uses has risen almost as much as silver use has declined in photography and jewellery. The total supply of newly refined silver entering the market meanwhile has risen, as the higher prices have discouraged fabrication demand in jewellery and silverware but encouraged mining and secondary recovery of silver from scrap. Investment demand, a critical price-setting market segment, has been very strong for silver, with new investors entering the market even as longterm silver investors continue to sell metal they have held for many years. Other supply and demand highlights in the report include the fact that the physical silver market operated in a deficit for the fifteenth consecutive year in 2004, with newly refined supplies falling short of industrial demand by 44.5 million ounces. This reflects a narrowing of the deficit from 202.8 million ounces in 1997 and from 67.0 million ounces in 2003. In 2005, the net deficit in the bullion market is projected at 31.4 million ounces.
Trading activity was much higher in 2004. In 2004 clearing volume in the London Bullion Market Association rose to total 26.4 billion ounces, up 12.5% from 2003 volumes. Combined futures and options trading volumes on the New York Commodity Exchange, the Tokyo Commodity Exchange, and the Chicago Board of Trade rose 32.8% to 31.8 billion ounces in 2004, exceeding the LBMA clearing volumes by a wide margin in a reversal of historical trends in the major silver markets worldwide. The CPM Group Silver Survey discusses that many silver market participants have been expecting an upward shift in silver prices for several years, based on the view that the long-term drawing down of above-ground inventories since 1990 ultimately would cause silver prices to rise sufficiently high enough to stimulate increased supplies and to encourage reduced silver use in jewellery and silverware. The report concludes that the rise in silver prices since 2002 appears to be this long-expected revaluation of silver. 3.2 Technical Comments Long Term Technical Comments Silver drifted down in price in August, falling below the 65 WMA: Daily/Weekly Technical Comments London fix in USD/oz: Open High Low Close 7.250 7.255 6.740 6.740 1at August 3 rd August 31 st August 31 st August
London fix in /oz: Open High Low Close 5.930 5.930 5.529 5.529 1 st August 1 st August 31 st August 31 st August Silver broke through price support in August. This may be a signal that the almost four-year-old bull-market in silver is coming to an end. We would however, like to see several weekly closes below about 6.90 USD/oz, before we jump to that conclusion. Let s see what September brings shall we? J. Fineron / 1 st September 2005
Appendix: More about this report Purpose of the Report The purpose of this report is to comment on developments in the gold and silver markets on a monthly basis. Johnson Matthey plc issues reports on the platinum group metals: http://www.platinum.matthey.com/publications/price_reports.html This document is supplied in PDF format. To view, you may need to download the free Adobe Acrobat Reader: http://www.adobe.com/products/acrobat/readstep.html This report is prepared in the English language, as are the vast majority of contributions on precious metal markets. Structure of Report The report comprises two sections: Fundamental Considerations This section addresses aspects of supply and demand in gold and silver, which typically affect the market over periods of several years. Over the long term, the price of a commodity will rise or fall until natural supply and demand reach equilibrium. Completion of this process, can take many years and is significantly influenced by hoarding and dis-hoarding. For example, dishoarding of stockpiles to compensate for supply shortages can proceed over decades and thereby delay movement to a true equilibrium price. Technical Comments This section describes aspects of technical analysis in gold and silver, which can be used to assist in buy and sell decisions over periods of weeks to months. Traders often use technical analysis to trade or profit from price movements up or down. Because large traders, e.g. hedge funds, often use the same signals, price-movements are often amplified and technical signals become self-fulfilling prophecies due to the herd-mentality. Learn more about technical analysis: http://stockcharts.com/education and the terms used: http://stockcharts.com/education/glossarya.html Learn more about candle charts: http://www.litwick.com/about.html All charts used are courtesy of Stockcharts.com unless otherwise stated.
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