Gold Investment vs. Industry

How does Gold Investment demand figure against industry and jewelry buying in 2010...?

A WORLD LEADER in producing precious and special metal products for industrial use, Heraeus Precious Metals serves the automotive, semiconductor, electronics, and medical industries.

Head-quartered in Hanau, Germany – and earning € 1.8 billion from product revenues in 2008 against €12.9bn from precious metals' trading – parent company W.C.Heraeus employs almost 5,000 staff. Its gold refining capabilities in Germany and Hong Kong both meet the London Bullion Market Association's strict requirements for "Good Delivery" status, the benchmark for professional dealers and investors worldwide.

Here the vice-president of marketing at Heraeus Precious Metals Management, Miguel Perez-Santalla, speaks to Hard Assets Investor about his outlook for industrial gold demand – versus Gold Investment demand – in 2010...

Hard Assets Investor: Here we are, in a new year. What are your thoughts about what we saw in 2009, and maybe looking forward to 2010...?

Miguel Perez-Santalla, vice-president of marketing, Heraeus Precious Metals Management: Well, in the beginning, we saw some consumption from the industrial side when it was at the lower end of the spectrum. Once the Gold Price started rallying, the industry needed to continue buying metal. But they started holding off.

So the actual physical consumption of metal is way off from the industrial sector. But the Gold Investing market is the main demand in driving the price up. Everything is being delivered on the Comex and to the London warehouses. That's where it's all going. So if we're talking gold, that's really where the demand is.

HAI: Now, is that so sensitive to price? I mean, investors who are Buying Gold, they're buying it on the idea that gold is a safe haven. They see monetary policy, and some say fiscal policy, which portend inflationary pressures down the road. And as long as that remains the mentality, will we see this steady flow of investment money into gold?

Perez-Santalla: Well, I think one of the biggest issues is that, since there's nowhere to earn money securely, people are hiding their money in precious metals, including the other metals as well. So gold is getting all that luster. It's growing on that. And everyone's thinking that the valuation might be coming to and driving the Gold Price up.

In the end, though, I think once the Federal Reserve starts to raise rates even the slightest bit, it will be a major effect on gold. I think gold has run out of steam at the moment. The Fed's going to raise rates eventually. And, once it does, the price will come off.

HAI: Now, we did start to see the price pull back. Was that possibly in anticipation of this shift in monetary policy? Or was it just a minor correction in that uptrend right now?

Perez-Santalla: I think it's a minor correction at the moment. If the monetary policy of the Fed doesn't change, gold can continue to go higher or go back up to the highs at least that we've seen. Because that's where the investment money goes. Remember, the precious metals market is actually a very small market. So a little bit of money can make that price move higher.

HAI: One thing that got a lot of attention last year was the central banks moving in and purchasing gold. But they were aggressive sellers of gold back in the '90s when we were at $250 an ounce. So are they better contrarian indicators than investors you want to follow?

Perez-Santalla: Well, I don't think they're investors at all. And really, India did a swap with the IMF. So it didn't affect any supply and demand factors in the marketplace. And even the other central banks – like the Russian central bank – just took off fresh supplies from their [domestic] market. And so I don't see them being a good guidance at all to look at. And I also think that central bank activities had a nil effect on real supply and demand factors.

So if you're looking for fundamentals, there's no real fundamentals here. This is strictly Gold Investment money driving the price higher because of the size of the market and the size of the investment money coming in.

HAI: It seems you feel it's a little bit bubbly up here. Let's assume the Fed does change its monetary policy sometime in 2010; where can gold go? What is the average cost of production?

Perez-Santalla: Well, the average cost of production, that's a hard thing to nail down. But it's been projected between $400 and $500 an ounce.

HAI: So a significant distance from where we are right now...

Perez-Santalla: Exactly. It's a tremendous profit these Gold Mining companies are having if they're running their books properly, and also for anyone involved in that side of the business. So it could go down even that low. But I think that a healthy price level for the market would eventually be somewhere between $700 and $800 an ounce.

HAI: We dipped down into the $700 handle in 2009...

Perez-Santalla: Yes we did. And at that time, industrial demand grew. And they started Buying Gold in the jewelry sector too – traditionally the largest consumer of gold – really buying a lot and selling to the public a product.

HAI: Now, you talked about the commercial interests, the commercial players in the market, and how they're making really good money right now with the price where it is. That would imply production is way up?

Perez-Santalla: Oh yeah, they've grown production. They're opening mines everywhere they can. So any place that they can get to gold easily, it's being done. So that's why sometimes you'll hear supplies are off here, or a mine has some trouble in South Africa and it's closed up for a month...doesn't really affect supply. And also, with these high prices, we're getting a lot of scrap supply, which means people are rummaging through their drawers, are going through anything they can to find precious metals to sell, to raise some cash. So even here, the supply of gold feels infinite, from our point of view.

HAI: What is the ratio – ballpark – in terms of Gold Investment demand to jewelry and industrial demand?

Perez-Santalla: Percentagewise, traditionally, jewelry was 80% and investment was down as low as 5%, in terms of the actual consumption. But now we're seeing that jewelry demand is only about 30-40% and predominantly, the rest is investment.

HAI: A lot of the interest in Gold Investing has come from a view that the US Dollar is going to continue to decline. But we started to some improvement in the Dollar over the last few weeks.

Perez-Santalla: Actually, I believe it will continue. But what's driving that is the low interest rates. People are selling those Dollars to Buy Gold. They borrow Dollars, sell them, and buy the gold. That's how the investment community tis driving it, because the banks are lending to the investment community, not to the industrial sector.

HAI: So you'd say your outlook, at these price levels, is cautious?

Perez-Santalla: Yeah, I'd be cautious. In the beginning of 2010, I'd say gold is going to start to go up again. But there'll be a correction coming.

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