Gold Market Surplus to Widen in '09

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"The 'stellar performance' on the demand side will come from ETF demand, which could add another 400t by year end, though this estimate may be too conservative."

The gold market surplus will widen from 60t (1.9m ounces) to 284t (9.1m ounces) this year, despite the fact that total gold supply is expected to weaken slightly to 3,770t (121m ounces), says the VM Group.

The Group said in its recent Yellow Book that although this was the largest surplus for a number of years, it was "relatively modest" given the potential for investment demand outside of ETFs and coins to absorb this metal.

"It does emphasize however, how it is investment demand that is driving this market, given the decline in support from dehedging and jewelry sales," commented the VM Group.

Gold mine supply is expected to fall by 1.3% year-on-year to 2,295t or 73.7m ounces in 2009.

The Yellow Book said that lower mine supply will continue to impact world gold supply in 2009 as a further decline in South African production alone will offset higher production in China, Russia and Peru.

It said the long-term situation in South African gold mining was bleak as the increasing depths and geological complexity of the country's gold deposits made exploitation and extraction a very difficult and expensive task.

"When combined with the current lack of credit, we foresee another decline in South African output in 2009 and this alone will offset gains in China, Russia and Peru."

The Group said Australian production would also fall by 20t and Canadian gold production by 7t. The risk to the upside in production was higher prices, which would encourage more mining.

Scrap supply will increase by 13% to 1,261t (40.5m ounces) on the back of a stronger gold price, filling the void of gold hedging expected to fall to only 16t from 33t in 2008.

The VM Group said central bank gold sales will fall again this year. The majority of sales come from signatories of the Central Bank Gold Agreement (CBGA), which ended on 26 September this year.

"We are expecting sales of only 150t (4.8m ounces) for this, the bulk of which is in the final year of the current CBGA round, unless any new sellers emerge. Even if they do, total sales are likely to be less than 200t (6.4m ounces)."

The Group said that on the demand side adornment jewelry demand would rise slightly, but it expected sharp falls in the event of a sustained gold rally.

The "stellar performance" on the demand side will come from ETF demand, which could add another 400t by year end, though this estimate may be too conservative.

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