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Credit Suisse Report Sets Gold Market on Fire

The U.S. dollar is hitting new lows against a basket of currencies, the oil price is rapidly approaching the $100 mark and now Credit Suisse is warning that falling gold production could cause a “quantum upward change” in the price. A perfect storm of bullish factors for gold as it approaches the all-time high of $850.

“Our studies indicate in the long term global gold production will begin to decline as the diminishing number of new reserves fail to compensate for dying mines,” noted David Davis, a research analyst at the bank, in the most recent “Gold Note.”

Last year, South African gold output fell to 275 tonnes, down from 296 tonnes in 2005; U.S. gold output declined from 262 tonnes to 260 tonnes; Australian production fell to 251 tonnes from 263 tonnes; Peru production declined to 203 tonnes from 207 tonnes; Russian gold output dropped to 152.6 from 156.6 and Canadian output fell from 118 tonnes to 104 tonnes.

In fact, China was the only major producing country to increase production, from 224 tonne in 2005 to 240 tonnes in 2006. Even though the country’s production is set to increase again this year, already up 13% from last year, production from South Africa, Australia and the U.S. is forecast to further decline in 2007.

“The decline in global gold production will likely be accelerated, should the gold mining industry continue to incur significant year-on-year inflation rates which are not offset by similar or significantly higher gold price increases year-on-year,” said Davis, alluding to the impact of cost increases on marginal mines.

Global production for gold peaked in 2001 at 2,604 tonnes or 83.7 million ounces. With 2006 production at 2,467 tonnes, annual gold mining supply has fallen 4.4 million ounces in five years. Since 2001, prices have more than tripled from $260/oz.

Spot New York gold opened at $819.00 bid, up $11.90 per ounce, but has since risen $16.85 to $824 bid by mid-day after touching $825.50 on the offer side, a level not seen since January of 1980.

Gold prices have gained nearly 5% in November, 11% since October and 21% since August. So far this year, gold is averaging $677, dwarfing last year’s average of $603, up 30% since the start of 2007.

Mark O’Byrne, director at Gold Investments, concurred with Credit Suisse in an e-mailed update this morning, saying “gold will experience a quantum jump in the coming months.”

“This could result in a gold price over $2,000 per ounce in a short period of time,” Byrne ambitiously noted.

The report also noted that were it not for continued selling from European central banks and others, the supply/demand situation for gold is in deficit. According to Davis, these sales will fall and eventually cease in the not-to-distant future as banks become buyers, sending the gold price higher still.

Signatories within the Central Bank Gold Agreement of 27 September 2004, which limits gold sales to 500 tonnes per agreement year, have sold on average 8.1 tonnes per week so far this year, as compared to 6.7 tonnes per week last year.

Banks have thus far reported 40.7 tonnes of sales since 27 September 2007, after ending the third agreement year at 475.75 tonnes.

Davis further noted that “the dynamics surrounding the gold supply and demand have begun to change inexorably” with increasing investment demand, “which will ultimately impact the gold price.”

In early August, RI reported that bullion inventory of the world’s largest gold exchange traded fund (ETF), StreetTRACKS Gold Shares [NYSE:GLD], hit a record high of 506.7 tonnes, surpassing the mid-April peak of 500.7 tonnes. Since then, holdings have risen nearly 18% to today’s 597.53 tonnes valued at $15.45 billion.

In addition, the World Gold Council forecasts increased jewellery demand from India in 2007, which accounts for nearly 40% of all global gold jewellery demand – with jewellery demand making up 70% of the global gold demand.

A WGC official said on Monday that India's gold sales during the forthcoming period of peak festival demand leading up to Diwali are expected to rise by 10%-15% from a year ago. Indian gold demand in the first half of 2007 was 528.2 tonnes, compared to 2006’s full-year demand of 715.5 tonnes.

Dennis Gartman, editor of the Gartman Letter, said in Tuesday’s Letter that gold was indeed responding to the Credit Suisse study.

“As we write, Credit Suisse' thesis is being embraced rather enthusiastically by the market,” he said. “One cannot help but be impressed by gold's strength.”

Investors are using gold as an inflation hedge as oil prices surpass approach the $100/bbl level.

Crude for December delivery was last up $2.44 at $96.42 on the New York Mercantile Exchange, after hitting a new record high of $97 earlier.

Gartman said gold still remains “quite cheap” relative to crude oil in broad historical terms, as it currently takes only 8.50 barrels of WTI crude to buy one ounce of gold. The 36-year historic ratio is closer to 17 barrels per gold ounce, but it has been falling steadily since hitting a high of 12.53 bbl/oz on January 18.

RI last reported on this trend in late October, when the ratio hit a 2007 low of 8.45 bbl/oz. On Nov. 2, a new yearly low was touched at 8.24, a level not seen since July 2006 when gold was trading at $616/oz and oil at $74/bbl.

O’Byrne, however, said the dollar falling to new all time record lows against the euro and a basket of currencies is of more importance.

The euro was last trading at $1.4554 after earlier rising to $1.4571, its highest level since the united European currency began trading in January 1999. The dollar index dropped 0.5% at 76.05.

Morgan Stanley analysts warned today of a possible very sharp depreciation in the dollar. The decline of the dollar to record lows might turn into a “more violent correction” that requires the United States, the European Union and Japan to intervene in foreign exchange markets, analysts said.

In a note to clients, Stephen Jen and Charles St-Arnaud wrote: “The dollar could potentially weaken meaningfully further. Though coordinated interventions may not be an immediate threat, they should now be on our radar screen.”

On Oct. 31, the U.S. Federal Reserve cut interest rates by a quarter point to 4.5%, sending the dollar lower as gold immediately jumped $8.20 and crude $4.02, in an attempt to offset credit losses due to the subprime mortgage debacle.

Sources today report Citigroup Inc. may have to write down an additional $2.7 billion worth of subprime-mortgage backed and related securities, boosting its losses from asset-backed bonds to as much as $13.7 billion. That compares with potential losses of $5.4 billion for Bank of America and $4.1 billion for JPMorgan Chase & Co.

In addition to Merrill Lynch & Co., which last month reported $8.4 billion of writedowns, brokers such as Lehman Brothers Holdings Inc., Bear Stearns Cos., Goldman Sachs Group Inc. and Morgan Stanley all stand to lose as much as a quarter of their equity.

Jon Nadler, senior analyst at Kitco Bullion Dealers, said that reporting such damage will take many months and could stretch the period of uncertainty well into next year.

“The amount of money being thrown at bullion has risen exponentially once again as the worries sparked by the subprime debacle have spilled over to the banking sector, where investors expect further bad surprises to emerge,” he added.

Gold for December delivery rose $14.20 to $825 an ounce on the New York Mercantile Exchange. Earlier, the contract reached an intraday high of $826.

The record high for Nymex gold is $875 set in January 1980, with spot gold at $850.

Source: Resource Investor

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