 "Gold would underperform for several years: William Tankard")
Gold prices have corrected sharply in recent months giving a feeling that prices have fallen significantly and some have started talking whether this is a time to buy gold. Rajesh Bhayani spoke to William Tankard, Research Director at Thomson Reuters GFMS on the subject, William said that multiyear bear phase in gold is in place. He spoke at length about, futures of gold market, consolidation in mining sector, demand for physical gold and how will be India’s demand perform. Excerpts:
Gold prices have fallen sharply in recent past. Is this a bottom or you think market is turning bearish?
Initially we had thought that in 2013 prices will perform well after that and fall will start from 2014. But disillusionment for gold came to an end earlier than anticipated. Now consensus is emerging that a potentially multiyear bear run is in place.
One of the key driver for bull run in gold was absence of generating meaningful returns from other assets classes like interest rates and equities. Gold emerged comparatively better asset. Now there are speculations around when will US Fed end QE and at a time interest rates are rising while equities performing strongly.
With more options available for safer investments, it is impacting gold. These factors are hurting gold investment demand and making us believe that gold will underperform for next several years.
We saw physical demand coming in when prices corrected sharply in recent past. Do you think physical demand for gold can replace falling investment demand in paper gold or ETFs?
In recent past when gold corrected sharply, institutional investors were fleeing from exchange traded funds (ETFs), physical demand supported the market. However for meeting physical demand there are logistical constraints as bullion refineries may not be able to cope up with sudden demand while investors can sell gold quickly.
In future physical demand likely to play an important role, it can only partially replace fall in investment demand. This is one more reason why we are bearish for gold for next few years.
How will be gold mines hedging activity in coming years when prices have fallen significantly?
In past huge hedging was made by mines which was getting de-hedged and now only 100-150 tons of hedge positions are left in the market. (Hedging means selling gold to be mined in forward market). Hence now support of de-hedging for gold price is not available.
This is one more argument for bear market. If producers hedge their produce it will generate future supplies but looking at weak investment demand scenario further increase in hedging seems unlikely. Also gold mines are not looking at big investments which requires hedging.
Gold prices are trading little above its cost of production. How will mines react to this?
We have calculated in 2012 global gold mining cost including cash cost and other variables was $1200 per ounce and in in 2013 it will be only modestly higher. Very recently prices have fallen to that levels. In past when gold prices were rising, producers allowed some costs to go up.
Labour costs have gone up. Now producers will move to high grade gold mining by using flexibilities in the system and manage the cost. However unquestionably we will see small mines with small cash balance may cut production though that will be modest. Regions where costs are high will see aggressive production cuts.
In an environment of rising cost and lower price, do you see consolidation in gold mining sector? Will companies’ from big gold consuming countries like china, India come to buy gold mines?
In 2009-10 when mining companies’ equities were hit hard there was talks of consolidation however acquirers were offering unrealistic prices. Now if consolidation is to happen it can happen only at the right price.
Mines which does not have cash or struggling mines may face consolidation. We may see some activities from China as generally they are acquiring natural resource assets and that may happen in gold also. Indian companies buying gold mines cannot be ruled out.
With India taking measures to curb demand, will China cross India in gold demand?
We may see robust demand from China in coming years as the excitement for gold continues. For India it will be difficult to control demand beyond a point as gold is part of the culture. With import duty rates quite high it will change pattern of demand while during festivals we may see more pronounced period of volatility in demand.
In the multiyear bear phase how will prices move?
We see in 2013 average price could be $1,400 per ounce. Prices will remain calm in second half (July- December) between $1,200-1,300. In 2013 also prices could move in a range of $1,100-1,400. We have discounted in our opinion that investment demand will not be good like in past.
However in next 3-4 years we may see prices trading below $1,000 also. However when price fall below $1,000, we may see meaning full restructuring by gold mines where we could see supply curtailment, lower flow of scrap gold and market will be more constructive with lesser onus on investor community to balance the market.
Will central banks sell gold?
In the bull run that we have seen European central banks who had agreed to sell gold have cut their sales. Several emerging countries’ central banks have added gold as part of diversifying their reserve assets. These are all long term portfolio measures that will continue for several years.
Gold prices have fallen sharply in recent past. Is this a bottom or you think market is turning bearish?
Initially we had thought that in 2013 prices will perform well after that and fall will start from 2014. But disillusionment for gold came to an end earlier than anticipated. Now consensus is emerging that a potentially multiyear bear run is in place.
One of the key driver for bull run in gold was absence of generating meaningful returns from other assets classes like interest rates and equities. Gold emerged comparatively better asset. Now there are speculations around when will US Fed end QE and at a time interest rates are rising while equities performing strongly.
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With more options available for safer investments, it is impacting gold. These factors are hurting gold investment demand and making us believe that gold will underperform for next several years.
We saw physical demand coming in when prices corrected sharply in recent past. Do you think physical demand for gold can replace falling investment demand in paper gold or ETFs?
In recent past when gold corrected sharply, institutional investors were fleeing from exchange traded funds (ETFs), physical demand supported the market. However for meeting physical demand there are logistical constraints as bullion refineries may not be able to cope up with sudden demand while investors can sell gold quickly.
In future physical demand likely to play an important role, it can only partially replace fall in investment demand. This is one more reason why we are bearish for gold for next few years.
How will be gold mines hedging activity in coming years when prices have fallen significantly?
In past huge hedging was made by mines which was getting de-hedged and now only 100-150 tons of hedge positions are left in the market. (Hedging means selling gold to be mined in forward market). Hence now support of de-hedging for gold price is not available.
This is one more argument for bear market. If producers hedge their produce it will generate future supplies but looking at weak investment demand scenario further increase in hedging seems unlikely. Also gold mines are not looking at big investments which requires hedging.
Gold prices are trading little above its cost of production. How will mines react to this?
We have calculated in 2012 global gold mining cost including cash cost and other variables was $1200 per ounce and in in 2013 it will be only modestly higher. Very recently prices have fallen to that levels. In past when gold prices were rising, producers allowed some costs to go up.
Labour costs have gone up. Now producers will move to high grade gold mining by using flexibilities in the system and manage the cost. However unquestionably we will see small mines with small cash balance may cut production though that will be modest. Regions where costs are high will see aggressive production cuts.
In an environment of rising cost and lower price, do you see consolidation in gold mining sector? Will companies’ from big gold consuming countries like china, India come to buy gold mines?
In 2009-10 when mining companies’ equities were hit hard there was talks of consolidation however acquirers were offering unrealistic prices. Now if consolidation is to happen it can happen only at the right price.
Mines which does not have cash or struggling mines may face consolidation. We may see some activities from China as generally they are acquiring natural resource assets and that may happen in gold also. Indian companies buying gold mines cannot be ruled out.
With India taking measures to curb demand, will China cross India in gold demand?
We may see robust demand from China in coming years as the excitement for gold continues. For India it will be difficult to control demand beyond a point as gold is part of the culture. With import duty rates quite high it will change pattern of demand while during festivals we may see more pronounced period of volatility in demand.
In the multiyear bear phase how will prices move?
We see in 2013 average price could be $1,400 per ounce. Prices will remain calm in second half (July- December) between $1,200-1,300. In 2013 also prices could move in a range of $1,100-1,400. We have discounted in our opinion that investment demand will not be good like in past.
However in next 3-4 years we may see prices trading below $1,000 also. However when price fall below $1,000, we may see meaning full restructuring by gold mines where we could see supply curtailment, lower flow of scrap gold and market will be more constructive with lesser onus on investor community to balance the market.
Will central banks sell gold?
In the bull run that we have seen European central banks who had agreed to sell gold have cut their sales. Several emerging countries’ central banks have added gold as part of diversifying their reserve assets. These are all long term portfolio measures that will continue for several years.