British Gold Study Based Upon Supply/Demand Dynamics

Almost a year ago a very interesting and erudite gold study was published in the British press. The report was produced by the Economist Intelligence Unit (15 Regent Street, London SW1Y 4LR). Subsequently, it was reported in the Yorkton Natural Resources newsletter (London). Most of the following are excerpts from Yorkton - except for our own comments and observations at the end.

The study estimated the gold supply/demand dynamics under three scenarios for three 5-year periods: 1996-2000, 2001-2005 and 2006-2010, giving the respective probability of each. It also included the gold price in constant 1995 U.S. dollars in each case.

Supply -

The underlying rationale on the supply side requires gold prices to rise substantially in order to increase mine production to meet growing demand. One of their supporting arguments is the South African scenario. The report believes it would take a price of $500 to make it worthwhile to mine the bulk of South Africa's remaining gold. The report recognizes South Africa's mine production costs are rising so fast that within a decade $600 would be needed to unlock new production.

Demand -

On the demand side the study's authors feel accelerated growth is more a function of Far Eastern demand for physical gold than any other single factor. Western world jewelry demand will remain important. However, the Far East has traditionally treated banks and paper money with some suspicion. Subsequently, the future price of gold may well be set in the Orient.

The report concludes: "There is barely enough present mine production to cover four years of current physical demand, less recycled gold. Clearly the market is relying heavily on the souk and bar hoarders to disgorge significant amounts of gold. But will they do so at current prices? All the evidence suggests that they will not. In which case something will have to give - and we believe it will be the price."

Yorkton Natural Resources (London) concludes with "As we come to the inevitable end of the greatest bull market that Wall Street has ever seen, we believe that gold will increasingly be seen as an attractive alternative investment."

Below are the study's estimates and projections.

Source: EIU
* in constant 1995 $U.S.

The authors obviously favor the first scenario with a 60% probability. However, whatever the ultimate reality, it is readily apparent that gold prices (like any commodity facing accelerating production deficits) must substantially increase in the near future to stimulate production in order to meet growing demand.

Although the forecast above appears well grounded upon supply/demand dynamics, we feel more comfortable in taking the average gold price for each period - and weighted per its probability - to establish our own gold price objectives. A thus weighted average would project the following gold prices for each period.

-  Gold  to  reach  $471  per  ounce  between  1996 - 2000

-  Gold  to  reach  $535  per  ounce  between  2001 - 2005

-  Gold  to  reach  $632  per  ounce  between  2006 - 2010

It is meaningful to appreciate the above projections are based purely upon the fundamentals of supply/demand dynamics. No political nor economic anomalies are taken into account. Should they indeed occur, the gold price projections will undoubtedly reach their estimated targets in a much shorter period than that indicated above. Furthermore, the ultimate gold price reached may indeed be far greater than estimated above - since panic buying based upon political and/or economic strife will exaggerate market swings.

Needless to say there are several anomalies already looming on the horizon. Among them is one which may well have a significant impact upon the yellow metal's price: the Domino Effect. The devastating phenomena is wreaking currency and stock market havoc as it builds momentum in its relentless navigation towards western shores.

THE DOMINO TSUNAMI HAS DIRE RAMIFICATIONS FOR THE WEST.