Australian equity research firm Resource Capital Research (RCR) believes deteriorating economic conditions in the US could see the gold price potentially tick up from its current levels of around $860/oz, to $900/oz - this after a recent high of $1 011/oz in March this year.

"The near term outlook for the gold price remains closely tied to expectations of the direction of the US dollar and, behind this, the performance of the US economy relative to the rest of the world," states the company's September quarter research report on junior and mid-tier gold companies.

The report notes that a "major macro-economic bump hitting the US economy" – as has happened with the Lehman Brothers bankruptcy – will see US productivity growth impacted negatively in the fourth quarter of the year and the first quarter of next year, and the US dollar falling, which will drive a flight back to gold as a safe haven, potentially pushing gold back above the $900/oz level.

However, the gold price of $850/oz reached in 1980, equal to around $2 200/oz in today's dollars, is unlikely to be breached again.

As for gold producers, RCR notes that established gold producers, driven by the fall in the gold price from March to its current levels, have given up most of the share price gains made since mid-2007, with many juniors down 50% compared to 12 months ago.

For the period June to August, Newcrest Mining was down 25%, for example, Lihir Gold 31%, Newmont Mining 14%, and Barrick Gold down 16%.

Cash costs have also been offering little reprieve, with the average bill of the four largest global gold producers - accounting for 29% of global production - increasing 25% year-on-year (based on the most recent full year), and rising 4% in the second quarter of 2008 compared to the first quarter.

The RCR report also notes that producer margins are expected to continue to be affected adversely by structural trends in the sector.

These include rising industry cost pressures due to a number of factors such as falling mill head grades, deeper ore bodies, higher energy costs and increased demand for materials and labour; strengthening producer currencies (such as Canada and Australia) compressing operating margins and cash-flow; and the discovery of fewer and smaller deposits, impacting asset quality.

As for the supply and demand balance, RCR reports that recent years' gold sector supply and demand balance have been characterised by a broader base of gold investment; demand increases in China and India; net global production declines, as well as declines in traditional high producer countries such as Australia, the US and South Africa; production increases from developing countries, which have traditionally been considered higher sovereign risk and underexplored; and declining net sales by central banks.

On the supply side mine production is down 6% from 2001 to 2007, and jewellery demand has fallen from 3 000 tons in 2001 to around 2 500 tons in 2007.

On the demand side the last few years have seen a "large growth in demand for exchange traded funds (ETFs), which had aggregate holdings of 1 009,5 tons at the end of July 2008", says the RCR report.

This is a 16% increase from December 2007.

ETF holdings now equal that of the sixth largest central bank, and is ahead of Japan at 765 t.

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