Investor demand to push gold price higher in 2004 (page 3 of 3)

Gold production should increase by only around one percent in 2004 to 2,625 tons. Apart from mining production, the other significant component of gold supply has been central bank sales of gold reserves. In 1999, 15 European central banks agreed to limit their sale of gold reserves to a total of 400 tons annually for five years.

This agreement expires in September but will very likley be extended for another five years. Speculation surrounds the scope of the next central bank agreement. Expectations for the amount of gold these central banks will agree to sell annually range from 400 tons to 650 tons.

While at least two more European central banks are expected to join the next gold sales agreement, the aggragate amount of gold that these banks will sell is very unlikely to increase sharply due to the impact that such a change would have on prices.

In 2002, total central bank sales of gold amounted to 559 tons. Central bank gold sales are estimated to have increased slightly to about 575 tons in 2003. This year, renegotiation of the central bank gold sales agreement is expected to slow central bank gold sales to about 500 tons.

The final element of supply is scrap. Supply from scrap was 835 tons in 2002 and an estimated 865 tons in 2003. Rising gold prices have encouraged an increase in scrap supply. This year, scrap supply, pushed higher by rising gold prices, will probably climb toward 900 tons. The rise in scrap supply will moderate the decline in supply from lower central bank gold sales. Overall, the total supply of gold should be relatively unchanged this year. With gold supply steady, demand - specifically investment demand - will determine gold prices this year.

As in 2003, investment demand will benefit from global geopolitical instability and dollar weakness. However, this year, geopolitical instability and dollar weakness are very likely to intensify, pushing the price of gold toward $500 per ounce. Gold and gold mining stocks will remain an attractive investment and hedging vehicle in 2004.

Over the next few months, the price of gold is expected to be volatile. This volitility will come as a result of speculation ahead of the next central bank gold sales agreement. However, once this agreement is finalized, probably in the second quarter, the price of gold will move higher. The price of gold will continue to rise as the U.S. presidential elections approach in November.