Gold’s investor relevance remains as strong as ever Part 2

GAVIN WENDT: The second important gold discussion point relates to gold withdrawal data from the Shanghai Gold Exchange (SGE).

The latest figures for the week ending June 14 showed withdrawals of just over 46 tonnes – which represents a particularly strong figure for this time of year.

The primary deduction therefore is that Chinese gold demand, despite headlines to the contrary, appears to be alive and well.

Data also shows that half-year Chinese gold demand (as represented by SGE withdrawals) is comfortably headed for a new record at well over 1,100 tonnes.

SGE gold withdrawals have thus already reached 1,061 tonnes, which is well ahead of the half-year figures for 2013 (which was the previous record year).

During 2013 full-year SGE withdrawals totalled around 2,200 tonnes, whilst in 2014 they reached a little over 2,100 tonnes.

China continues to be the main driver of global gold demand, accounting for around two-thirds of global newly-mined gold production, which combined with India’s resurgent gold demand this year, will see the two gold-consumption giants ensuring the continuation of the flow of physical gold from west to east.

At the same time we’ve seen many international gold heavyweights looking to exit large, non-core domestic gold projects as they retreat to their North American or Southern African bases to lick their wounds.

This has presented once-in-a-lifetime corporate acquisition opportunity for cashed-up domestic gold companies, keen to expand their production profiles.

Companies like Northern Star (ASX: NST), Evolution Mining (ASX: EVN) and Metals X (ASX: MLX) are amongst the key gold sector players involved in strategic takeover activity over recent months, along with hugely successful advanced exploration play Gold Road Resources (ASX: GOR).

All of these companies have been top sharemarket performers, generating returns of between 40% and 75% over the past 12 months.

Summary

The gold sector continues to see strong Asian gold demand, with an ongoing transfer of gold from West to East.

China is keen to see its yuan as a de factor world currency, which means a gold-backed currency.

At the same time China is also keen to diversify its foreign reserves away from the current US$ focus.

In the US, a rise in interest rates won’t (despite popular rhetoric) be negative for gold.

Simultaneously, we will see supply-side headwinds in terms of declining reserves for the world’s top producers, which further underwrites my confidence in gold’s near and longer-term prospects.

I maintain my $1,200 gold support level for 2015/16, with the potential for prices to edge higher towards $1,300 over the next couple of years.

With the A$ expected to remain subdued compared to the US$, A$ gold prices will remain robust and operating costs will remain in check, providing robust operating margins for domestic gold producers – reinforcing the potential for above-average returns for investors.

 

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report

 

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