Gold fiddles while copper burnsBy: Charles CarlislePosted:...

Gold fiddles while copper burns
By: Charles Carlisle
Posted: '11-NOV-06 11:00' GMT © Mineweb 1997-2006



LONDON (Mineweb.com) --The past week has seen diverging fortunes for the prices of gold and other precious metals on the one hand and copper and its fellow base metals on the other. Even zinc and lead where the ever-declining stock position has not been getting any better, have suffered in sympathy with copper.

Whether any, or all, of this is justified remains to be seen. Gold broke free of its oil price leader and picked up steam heading upwards and breaking through a significant chart resistance level at around $600 at the end of October, and apart from a brief hiatus on the U.S. mid-term election results has since been going through a period of consolidation around the $630 level. Another break-out above $635 could mean that the GFMS prediction of $700 again by the year-end could yet prove to be accurate.

Meanwhile a number of bearish analyses of the copper market – one in particular from Merrill Lynch predicting a 30% fall in price next year – took their toll. Analysts conduct their studies with a mixture of assumptions – largely on demand trends – and supposed facts on the levels of mine supply. The general prediction has been for a slowing in the world’s economic performance from its currently quite remarkable 4.8% to a marginally more reasonable 4.3%, which still suggests substantially increased take-up of the metal in 2007.

On the supply side analysts reach their conclusions by listening to the CEOs of major corporations, and minor ones too, and tot up all their predicted output figures for 2007, and then add in projected expansions and new production. What often is not taken into account sufficiently is that producers frequently do not achieve their anticipated output levels, and new production seldom comes in on the predicted schedule. Most mining companies tend to be optimistic in their production outlooks. Figures seem to be predicated on all going well, but in mining there are usually a few apparently unforeseen hiccups which put output back a few months, by which time demand has ratcheted up another notch. Personally I think the predictions of a big supply surplus next year may not come about as a result.

Also, if some market specialists are correct, China, which has been the driving force for much of the base metals demand, particularly for copper, has been destocking throughout 2006 and the thought is that now the prices have dropped somewhat inventories are likely to be re-assessed and rebuilt, which will mean apparent demand around the year end may be a degree higher than generally predicted. Shanghai monitored copper stocks did, in fact, rise this week, but are still around 23,000 tonnes down over the past ten months.

Much of the rise and fall in base metals recently has followed the fortunes of LME stocks which, apart from zinc and aluminium, have seen an increase in the past month – although only that for copper has been in any way significant. There are indications that lead stocks in particular may be turning down again, while zinc stocks have been declining steadily for over two years, and as Mike Agg of Teck Cominco pointed out recently could be so low as to “constrain supply” by early next year should the pattern continue. If the fall continues at the current rate, LME zinc stocks could be down to zero within a couple of months! Now what that would do to the metal price is anyone’s guess, but it’s unlikely to have a negative impact!

Nickel stocks have also risen, despite the impact of the ongoing strike action in New Caledonia, but here supplies continue tight and demand growth may well more than match supply increases in the near future. We spoke here recently of the delays being experienced generally in bringing High Pressure Acid Leach (HPAL) plants on stream – these are necessary for the processing of the laterite orebodies on which most forthcoming production relies - and perhaps this was echoed by CVRD finance director Fabio Barbosa in a comment last week that new nickel supplies were likely to be constrained by technologic difficulties, high capex costs, resource shortages and labour disruptions in bringing new laterite projects on stream. He should know. CVRD Inco has one of the biggest of these projects of all at Goro in New Caledonia which has been beset by all of these.

Coming back to the precious metals, there is the feeling that there could be a general rerating for the platinum group sector, seeing an increase in price parameters, while gold itself seems to be consolidating again between $615 and $635 an ounce. This is a somewhat similar pattern to that seen in October with trading between $560 and $600 before the break out upwards to the current levels. At the close on Friday it was trading around $628.

Silver, as has been the pattern of late, has been tracking gold but, as one observer of the market has pointed out it is still around four times below its historic market differential with the yellow metal which, if you are a silver bull, suggests that there is huge upside potential here - to the $40 an ounce level. That’s what bull’s dreams are made of!


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