Gold supply is under pressure, Merrill fund manager says


By Dow Jones News Service
Wednesday, November 10, 2004

SYDNEY -- Merrill Lynch Investment Managers have a
favorable outlook for gold, underpinned primarily by
emerging pressures on supply, a leading member of
the firm's London-based natural resources team said
late Tuesday.

Amid "relatively static" demand, falling mine output
over the coming years and the potential for a reduction
in European central bank sales stand to prolong the
rally in U.S. dollar gold prices, Merrill gold fund
manager Evy Hambro explained during a visit to

"We are definitely in a positive environment ...
and that's going to remain until the fundamentals
deteriorate, and we don't see that changing,"
Hambro said on the sidelines of a presentation
to financial advisers.

Spot gold reached a 16-year high of US$436.85
a troy ounce Tuesday. At 0700 GMT, it was
quoted at US$433.88/oz.

Hambro's seven-member team is one of the world's
largest managers of gold equity investments,
overseeing about US$6.5 billion spread between
several mining funds.

Strong currencies in many of the leading
gold-producing countries are actually forcing
production cuts, despite the high U.S. dollar gold
price, Hambro explained.

"We've got a situation where the mined production of
gold is going to be declining for the foreseeable
future," he said.

According to London-based precious metals market
consultant GFMS Ltd., global mine production in
2003 remained flat about 2,590 tons.

While there are pockets of new supply emerging in
countries like Russia and China, Hambro said global
output will inevitably suffer from a lack of exploration.

"One of the big changes in the mining sector as a
whole has been a significant cut (in) exploration
expenditure, which is obviously reducing the
probability of finding new projects to exploit," he

Thus, gold reserves are increasingly being mined at
a faster rate than they are being replaced, Hambro

"For example, (Newmont Mining Corp.) has to find
7 million ounces of gold a year just to stand still;
in order to grow, they've got to (increase reserves)
more than that," he said of the world's largest

The same is true of other top producers, such as
South Africa's AngloGold Ashanti Ltd. (AU), Hambro

"You don't find 7 million ounce gold mines every day,"
he said.

A less certain, but nonetheless bullish, component of
Hambro's views on gold supply is the uncertainty
surrounding European central bank sales.

Early this year, 15 European central banks renewed
their 5-year-old gold sales accord, known as the
Washington Agreement, for a further five years.

Under the terms of the original deal, which expired
in September, the signatories agreed to limit aggregate
sales to 400 tons a year, or a total of 2,000 tons over
the life of the accord.

While the extension raised the annual cap to 500 tons,
this is "still well within the amount the market can
tolerate," Hambro said.

But the growing prospect that total sales will fall
below the 2,500 ton five-year cap, possibly by a wide
margin, represents significant upside potential for gold,
he noted.

"The question mark surrounding this agreement is
who is actually going to sell the gold, and this is what
is posing the big opportunity in the market today,"
Hambro said.

Large sellers under the first deal, including the Swiss
central bank and the Bank of England, are likely to all
but stand aside this time, according to analysts.

"The original speculation focused on the Germans, the
French, and the Italians," Hambro said, referring to
possible major sellers under the new agreement.

Initially, government officials from the aforementioned
countries were widely believed to be in favor of liquidating
large chunks of their bullion reserves to balance their
budgets and retire debt.

But in recent months, disagreements between
government officials and central bankers, surrounding
the mechanics and legal aspects of deploying the
proceeds from gold sales, have diminished the
likelihood of large sales by France and Germany.

"And the Italians have come out ... and said they're
not going to sell their gold at all and have no plans to
do so," Hambro said.

The market is thus currently trying to figure out
who might actually sell bullion, and musing over the
possibility that total sales might fall well short of the
2,500-ton limit, Hambro explained.

"If gold is not sold under this agreement, then the
market will be very, very exciting for a number of
years to come," he said. "The market could not
tolerate an absence of supply to this degree without
prices having to rise."


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