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It is hard to see the gold bear market ending soon       

Philip Klapwijk, Managing Director, Precious Metals Insights Limited, talked about the current price movement of global gold trade, physical demand in Asia, China’s gold mining sector and PGMs demand etc. while interviewed by Bullion Bulletin. Excerpts…

Global gold trade is now in a crucial juncture as the yellow metal is trading at four years low. How do you look at this price correction? Till how long will it continue?

I think this price correction will continue into at least 2015 and most probably well into 2016.  It is most unlikely that gold will be attractive to the majority of investors under conditions of a secular rise in the US dollar, low inflation and rising interest rates.  At some point in the future things will probably change, with a number of potential triggers out there for a new bull market in the longer run.  In the short to medium term though, it is hard to see the gold bear market ending soon.             

Coming to Asia, do you feel the present fall in prices will affect the physical appetite of Asian giants like China and India?

The key thing is the gold price in local terms.  Here the falls in price have often been rather less than what we have seen for US dollar prices.  That said, gold has moved lower in most currencies and this in itself provides some stimulus to demand, especially for high carat jewellery.  However, in the case of India consumers are not enjoying the full benefit of the drop in the international price because of government measures to restrict imports that have of course led to a substantial price premium in the local market.  And, when it comes to China, local demand is somewhat lacklustre because quite a lot of buying was brought forward in 2013 when the gold price first collapsed.  Also, demand in China appears to be negatively affected by the crackdown on corruption, the perception that gold prices may continue to drift lower and the general slowdown in GDP growth.              

3) Price of gold has now come down to $1160/ounce range and is expected to come down further. In this case, what is your view on the sustenance of the gold mining industry?

Ironically global gold mine production is likely to hit a record level this year.  But this is likely to represent a peak and from 2016 onwards we could see the beginning of a fairly substantial drop in global output.  The high production costs of some operations means that they are not sustainable at current prices.  Moreover, the mining companies have generally not been replacing reserves and so production will fall as some existing mines come to the end of their productive lives, a process that very low gold prices will only accelerate.      

Talking of other precious metals, what is your view on the overall demand for silver and PGMs? What do you foresee for the investment demand for these metals?

Demand growth for silver is being curtailed because of the global economic slowdown and, in some applications, due to substitution by lower cost alternative materials.  Platinum demand is lacklustre due to the European-centred diesel autocatalyst demand not growing and flat platinum jewellery sales in China.  Palladium is somewhat better placed as its major end-use in autocatalysts is more geared to the US and Chinese car markets.  The vast majority of investors are presently not at all interested in any of these white metals, with the partial exception of some retail investors' heavy purchases of silver coins.    

China has recently launched the global gold contract through SGE. How are you looking at this development? How is it going to help China to strengthen its global presence?

The SGE's International Board was launched in mid-September and so far volumes for the three physical gold contracts it trades have been rather small.  However, it is early days and the new platform in the Free Trade Zone could well become an interesting vehicle for gold trading and Renminbi arbitrage in the future.

Lastly, what is your projection on growth of China’s gold mining sector in a decade time?

I think that the highly atomised gold mining sector in China will be somewhat consolidated and rationalised over the next decade.  This, especially under conditions of lower gold prices in the next few years, implies that output will eventually fall.  The decline in production could be reasonably important because average grades mined have already been falling on a secular basis in spite of local mining enterprises’ general intention to maximise current output.  

Philip Klapwijk is Managing Director of Precious Metals Insights Ltd and has over 25 years experience analysing the gold, silver, platinum & palladium markets. Philip was previously Executive Chairman of GFMS and Global Head of Metals Analytics for Thomson Reuters GFMS.

Disclaimer: Views are personal and not the views of the publisher.