By Yaser Anwar, CSC of Equity Investment Ideas

This week I’d like to cover topics surrounding gold. From a) Market Sentiment to b) Demand and c) Supply to d) Implications of de-hedging. Thanks in advance for your time.

Market Sentiment Too bullish?

• Consider this- 1) Bloomberg’s most recent Gold survey indicated 23 of the 32 analysts & traders advised buying gold and only three said to sell, with five being neutral.
• 2) The top 100 amateur investors tracked by Marketocracy.com recommend Goldcorp. Also, all major brokerages expect gold to hit $700 by second half of 2007.
• 3) The Commitment of Traders report- (keep in mind commercial traders are a much better indicator of price movements than speculative ones) from Jan 9th to Feb 27th, the speculative traders added 12.11 million oz of net longs to take their position to 21.6 million oz (Gold fell quite a bit since then, especially Feb 27th, about $30+).
• In the week to 6 March we saw 5.5 million oz of net long liquidation and estimate that there has been about 4.5 million oz of long liquidation since then. I’m expecting the COTR report to show a fall in net long positions to about 12.6 million oz. Given this drop in large proportion of the net long positions of speculative traders, the market is approaching buying levels (keep an eye on COTR report due imminently).
• 4) ETF creation and buying frenzy. This month India will release three gold related ETFs, and in 07 we will see gold ETFs come out for Germany, Luxemborg, Italy. Also, StreetTRACKS Gold ETF, GLD, (the largest gold ETF accounting for more 80% of the metal held by ETFs) added 10 tonnes of bullion last week and more than 37 tonnes just in Feb).

"..But There Is Demand, Yaser."

• Middle Eastern CB’s Gold Moves– Qatar tripled its gold reserves in Jan. (USD 43.4 vs. 14.6 in December) to protect against a weakening dollar. UAE will be converting 10% of its FX reserves, USD 23 billion, into gold as well.
• Economists see US dollar devaluation now imminent as the US economy adjusts to accommodate its twin deficits, and that means that for foreign CBs holding non-dollar assets like gold and the Euro/Swiss Francs/Pounds will help protect the value of their FX reserves.
• According to CPM Group (leading commodities research provider), Worldwide investment demand for gold is forecast to remain at historically high levels in 2007, with investors continuing to buy large volumes of gold in bullion, coin and jewellery.
• CPM’s 2007 Gold Yearbook report predicted investors would add another 39.7 million oz to their gold holdings in 2007, after investing 43.5 million ounces in 2006. The report said 2005 investment demand grew by 46.7 million oz vs.the average annual net purchases of 9.2 million oz of gold investment from 1950 to 2000.

What About Supply?

• Statistics South Africa, reported that gold production fell by 12.4% YoY in December, while overall mining production fell by 1.1% in 06 (marketing the first annual decrease in seven years).
• According to China’s National Development and Reform Commission, gold output in 2007 is expected to increase to 260 vs. 240 in 06 tonnes, with 700t of new mineral reserves added.
• Peru- National Statistics Institute data revealed (this past Thursday) that Gold output fell in Jan to 14 tonnes, -22% vs. 06. The January gold output fall was due to a 49% decline in gold output at Yanacocha (South America’s largest gold mine.

Implications of Gold De-Hedging

• Gold de-hedging slowed sharply in the 4th Q of 06, with 1.12 million ounces removed from the hedge book vs. the 3rd Q, with Barrick Gold (which is currently being rumored to make a bid for Newmont Mining) reducing 1 million oz in its forward corporate gold sales contracts. The market is expecting the rate of producer de-hedging to slow sharply in 07 as activity in 06 was boosted by a non-recurring event caused by the Barrick’s acquisition of Placer Dome.
• I believe that gold interest rates have more upside due to a slower rate of de-hedging and the possibility of new forward sales related to projects or by-product production (as I’m writing this, Bloomberg weekly surveys are expecting Gold to rise this week thanks to the not-so-benign economic data of Friday).

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