CHICAGO, Oct. 12, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Metals & Mining, including Kinross Gold Corporation (NYSE:KGC), Agnico-Eagle Mines Ltd. (NYSE:AEM), Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG) and Newmont Mining Corp. (NYSE:NEM).
A synopsis of today's Industry Outlook is presented below. The full article can be read at
As per the World Gold Council, 2011 was a milestone year for gold as global demand for the yellow metal grew 0.4% to 4,067.1 tons at an estimated value of $205.5 billion -- the highest tonnage level with a value exceeding $200 billion since 1997. The increase was mainly propelled by the investment sector, particularly in India, China and Europe.
In the second quarter of fiscal 2012, gold demand was at 990 tons, down 7% year over year. Increase in demand from central banks was offset by declines in demand for jewelry, investment and in the technology sectors, due to higher prices. Central banks continued to be the primary purchasers of gold, accounting for around 16% of total gold demand, at 157.5 tons. This was a record quarter for central bank, buying more than twice the purchases in the second quarter last year.
In absolute terms, gold demand in the quarter was valued at $51.2 billion, a 1% decline from the second quarter of fiscal 2011. Average gold price in the first quarter stood at $1,609.49, 7% above the prior fiscal's quarter.
Investment demand declined 23% to 302 tons, due to lower demand for ETFs and physical bars, particularly in India and China. Gold demand in the technology sector was 1,112.2 tons, a 5% decline year-over-year due to higher gold prices, weak consumer demand, uncertainty in Europe and substitution to more affordable alternatives.
Jewelry demand dipped 15% to 418.3 tons due to higher price levels. Jewelry demand in India, a major consumer of gold, was down 30%, mainly due to a deprecation in the Indian rupee against the US dollar, which led to record high local prices. Furthermore, slowing GDP growth, domestic inflation, high interest rates and below average monsoon rain also contributed to the decline. Gold in India is currently at an all-time high in rupee terms.
In China, another major market, demand for gold decreased 9% to 93.8 tons as consumers were discouraged by the slowing GDP growth and the lack of clear trend in gold price. However, China is expected to resume its pace as economic growth is expected to pick up as a result of the monetary easing implemented in the second quarter.
Mine production inched up 3 tons to 706.4 tons, up 3% year over year. Adverse weather conditions, interruptions at few operations and slower ramp up of production at few mines affected the production numbers during the quarter. Recycling activity decreased 12% to 363.7 tons, bringing the total supply to 1,059.1 tons, down 6% year over year.
Russia is becoming an important player in the global gold market. The Central Bank of Russia remains a significant purchaser of gold. A healthy domestic economy is driving the demand for gold jewelry in the region, catapulting it to the position of the world's fourth largest gold jewelry consumer. The region accounts for 8% of the total global gold output.
Gold prices in 2011 ranged from a low of $1,310 per ounce to a high of $1,895 per ounce, with an average gold price of $1,572 per ounce in 2011. The record gold price of $1,895 per ounce was attained in September, 33% higher than the 2010 peak of $1,421 per ounce recorded in November 2010. So far in 2012, gold has ranged from $1,540 per ounce to $1,791.75 per ounce, with an average of $1,656.18 per ounce.
Continuing concerns about Europe's financial problems and China's reduced economic growth forecast led to the climb. Furthermore, the announcement of a third round of quantitative easing led to a surge in the price of gold. Given the performance in 2011, and thus far in 2012, we expect this year to be stellar for gold.
This climb in gold prices has not translated into increased revenues at all of the gold miners. In the second quarter, while revenues at Kinross Gold Corporation (NYSE:KGC) and Agnico-Eagle Mines Ltd. (NYSE:AEM) benefited from higher average realized price of gold, Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG) and Newmont Mining Corp. (NYSE:NEM) could not capitalize from them due to increased cash costs. Moreover, Goldcorp was riddled with production issues at its Red Lake mine.
As prices for gold rise further, gold giants such as Barrick Gold and Goldcorp being unhedged producers of gold will enjoy significant leverage to gold prices. The cost increases need to be controlled in order to rake in profits. On the other hand, gold producers like Newmont and Kinross are slated to suffer from lower ore grades that subdue production levels, increase mining costs and negate the benefits of rising gold prices.
Ironically, rallying gold prices have not had the same effect on the share prices of the gold companies. Investors prefer alternative financial products that allow them to invest in gold, rather than investment in gold companies per se. These companies may be entangled in labor issues, escalating cost and other risks.
Gold remains a coveted asset, given its long-term supply and demand dynamics and influenced by macro-economic factors. The value and wealth preservation attributes of gold continue to attract investors and consumers, and is considered a safe-haven investment. Concerns regarding economic growth in developed countries have made gold an attractive and safe investment option.
The European sovereign debt crisis promoted gold as a currency hedge for European investors.
Lingering economic concerns, higher inflation expectations in many countries, including India and China, and the relentless Euro-zone debt crisis will continue to drive gold prices this year, as well. India, which alone consumes nearly 45%−50% of the world's gold, should drive demand for gold along with China. China will likely emerge as the largest gold market in the world in 2012 and Chinese gold demand is expected to double in 10 years.
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