TORONTO (miningweekly.com) – Gold could lose more luster in 2014 and test a new four-year low at $1 100/oz, as safe-haven buying tapers on the back of a recovering US economy and the expected eventual de-escalation of tension in the Ukraine, consultancy Metals Focus said on Wednesday.

Despite gold enjoying an impressive start to 2014, which saw prices rising from the end of December’s trough by 16%, to a six-month high of $1 392/oz in mid-March, the consultancy affirmed that it firmly believed that a “washout” similar to 2013, which was triggered by sizeable investor liquidations, was unlikely to be repeated this year.

It said that the high-end of its price guidance for gold this year had been reached, with the price already moving lower.

“In the short term, the US recovery regaining momentum (thanks to improving weather conditions) and the eventual de-escalation in Ukraine are likely catalysts for lower prices.

“Meanwhile, the Fed’s [Federal Reserve's] ongoing reduction in its bond purchases, easing concerns about fiscal situations on both sides of the Atlantic and low inflation are all headwinds for the yellow metal for the rest of 2014,” the consultancy said in its inaugural report ‘Gold and Silver Mining Focus 2014’.

Metals Focus expected a broadly similar picture for silver, in part governed by gold’s moves. The full-year average was expected to fall just short of $20/oz, not far from current levels, but below last year's average of about $23.80/oz, as the grey metal’s fundamentals were expected to weaken.

FIRM FUNDAMENTALS

The report pointed to robust fundamentals for gold.

The aftermath of a decade-long gold bull market continued to send mine production higher. In 2013, production grew by 5%, taking global output to 96.7-million ounces.

However, last year, the total global gold supply fell by about 7% to 136-million ounces despite continued growth in mine output. This was entirely owing to a sharp decline in recycling on the back of weaker prices and reduced distress selling brought on by the tapering of the US Federal Reserve's stimulus measures.

Last year, gold demand was estimated to have grown by 17% to 157.9-million ounces, with the majority of the gains accounted for by jewellery and physical investment. The volume of scrap fell 26% to 39.3-million ounces and jewellery consumption rose 22% to 81.7-million ounces.

Therefore, the gold market recorded a structural deficit of 21.8 t, equivalent to three months of mine production.

This year, another drop in recycling should see the total supply ease further back.

However, despite physical demand being likely to moderate in many key consuming markets this year, Metals Focus expected overall volumes to remain at elevated levels, which combined with another structural deficit, would provide some support for prices for the rest of the year.

“Given plenty of above-ground inventory, other than temporary shortage of kilobars in Q2 [the second quarter], the gold market remained well supplied last year. Moreover, it is of note that 'Western' investors tend to set the price while the physical markets react to it.

“That said, gold’s robust fundamentals were key in preventing gold from falling further, at a time when professional investors were aggressively shorting the metal and 'core' longs (exchange-traded fund holders) have been losing faith in gold,” Metals Focus said.

For silver, the global supply was expected to rise by about 2%, compared with a 4% drop in world silver demand. The most significant change, on either side of balance, is expected in physical investment, which was forecast to drop by about 11%.

COST INFLATION TRENDS LOWER

Further, the report found that the recent trend of production cost inflation slowed dramatically in 2013, and for the primary silver sector even reversed slightly. This improvement was in part driven by miners’ necessity to cut overheads following the decline in metal prices and was further aided by a weakening of many producer currencies, lower royalty payments and an increase in processed ore grades.

Overall, total gold cash costs rose by just 2% year-on-year to $750/oz, while on the all-in sustaining metric, costs fell by 3%, to $1 018/oz.

The cost of producing an ounce of silver fell on all metrics. Total cash costs dropped by 2% to $9.17/oz, while on an all-in sustaining basis they fell by 8% to $15.14/oz.

“We expect gold mine cost inflation to remain contained this year, as producers continue to focus on streamlining their assets,” the firm said, noting that in the silver sector costs may well come under pressure from the new Mexican royalty (Mexico accounts for over a third of global primary silver mine supply) and further reductions in the value of offsetting gold by-product credits.