Positive portents still for gold and silver

With South African gold output continuing to fall, exacerbated by the power problems being experienced there, the gold price is being underpinned by production losses and the continuing ‘managed’ devaluation of the US dollar.

LONDON -

With gold and platinum very close to historic highs and palladium and silver close to recent peaks, observers, and investors, will be watching the precious metals markets closely this week and picking up fast on what may be seen as any defining trends.

This morning, all four precious metals initially moved to slightly ahead of Friday's closing levels with silver perhaps the best performer in percentage terms, but the European markets had not opened at the time of writing.

What are the portents? Overall still positive for all we would feel. In supply/demand terms gold is likely to remain strong, with one of the world's largest producers, South Africa's Gold Fields, for example, forecasting a 20-25 percent fall in its March quarter production due to the power outages earlier in the month and only being able to continue to operate at around 90 percent of its ideal power supply levels. Indeed the miner puts ongoing production losses as a result of the continuing electricity cutback at 15-20 percent and predicts nearly 7,000 job losses as a result.

Gold Fields is unlikely to be unique among South Africa's deep gold miners so we can expect similar losses elsewhere and with South Africa still probably the world's largest producer last year, albeit by a tiny margin over China, these losses have to be significant for the market helping to underpin the price.

But what of China? As South African production falls, Chinese output continues to rise, but so, according to reports from the World Gold Council does China's appetite for gold as a consumer. The country has now moved into second place in the gold consumption stakes overtaking the US, but still well behind India, and seemingly this growth has been apparent despite the rising metal price. But this is indicative of a huge trend as the Chinese domestic economy continues to grow at a huge place bringing more and more people every day into the potential gold owning bracket.

As to Chinese production, it too may have been hit in the first quarter due to the unprecedentedly bad and cold weather which hit the country ahead of the Chinese New Year. No figures have been forthcoming on this so far, but it is unlikely that only the country's coal producers have been suffering from the vagaries of the climate.

Overall though it will probably remain the strength of the US dollar which governs the principal movement pattern in the gold price and there is no sign yet that the semi-controlled dollar devaluation policy being exerted by the US Fed through interest rate cuts is drawing to a close. Analysts are looking for another half percent cut, although there is the possibility that if this doesn't occur there may be a blip in the advancing gold price pattern.

As we noted here in the article on silver on Friday - Positive on silver - despite chronic oversupply - silver is continuing to be dragged upwards by gold - or perhaps dragged is not the right word as the recent advance has been stronger in percentage terms than that for gold. As the gold price rises, the jewellery and investment offtake for silver will likely rise too as those who are being priced out of the gold market at the lower end of the earnings spectrum could well be persuaded to enter the market for silver instead, secure in the knowledge that of late at least silver has moved upwards alongside the gold price - and in some periods has outperformed its yellow cousin.