Gold price is forecast to stay above $900 this quarter

Supply problems in South Africa to blame

By Tom Stundza -- Purchasing, 2/27/2008 11:36:00 AM

High and volatile gold prices reduced fourth-quarter gold demand with tonnage purchases falling by 17% from year-earlier levels, says a new report from the World Gold Council and GFMS Ltd. Still, for the year, purchasing was 4% higher in 2007 at 3,547 metric tons even though the average annual prices increased to $695/ounce from $603 in 2006. Looking ahead, gold’s price is expected to remain over $900—at least for the rest of the first quarter—because of supply cutbacks.

Since the reduction in gold production by Gold Fields, AngloGold Ashanti and other South African producers because of power supply issues, the price of gold has jumped from $800 in December to $915 this month. Previously, analysts had forecast gold to average $883 for this year, but that may be revised upward.

Nick Holland, CFO of major producer Gold Fields, who made the price prediction on the sidelines of the BMO Capital Markets, 2008 Metals & Mining Conference in Miami, says his firm’s South African operations are likely to have 25% less output than usual because of power problems. He tells Dow Jones Newswires that production in the January-March quarter will be around 500,000 oz due to the recent work stoppage following power rationing by state utility Eskom.

Holland suggests that production could get back to about 570,000 oz in the second quarter, “assuming the company will have 90% of power availability restored,” which still would be 12-13% less than a year ago. Similarly, Mark Cutifani, CEO of AngloGold Ashanti , say his South African company faces a 400,000-ounce reduction of gold output in 2008, assuming it can receive 90% of its power supply needs.