JOHN PARTRIDGE, INVESTMENT REPORTER,
http://www.theglobeandmail.com/servlet/story/LAC.20060817.RGOLD17/TPStory
17th August 06

As the 110th anniversary passed yesterday of a chance discovery by prospector George Carmack that set off the Yukon gold rush, investors’ appetite for the metal appeared set to remain strong for the time being.

However, it will likely take considerably less volatility in prices
to coax jewellers and their customers, gold’s biggest buyers, back into
the market, according to the World Gold Council in London.

The council said yesterday that while identifiable investor demand
for the yellow metal in the second quarter shot up by 19 per cent from a year earlier to 130 tonnes, the jewellers picked up just 62.5 tonnes, down nearly a quarter and the lowest amount in three years.

This was the key reason overall demand for gold in the quarter fell
by 16 per cent to 802 tonnes, marking the third consecutive quarterly
decline, even as soaring prices drove the value of total demand up 23 per cent to $16.2-billion (U.S.).

“Price volatility has, as expected, had a detrimental effect on demand in tonnage terms,” council chief James Burton said in a statement.
“However, it is reassuring to see people are spending more on gold. Sentiment towards gold has remained strong.”

Gold prices have fluctuated wildly in 2006. They began the year below
$570 an ounce, shot to an intraday high of $785 in early May, then plunged back to $616 early the next month.

The rise and fall has continued since then as key influences, including U.S. interest rates, the value of the U.S. dollar and various geopolitical tensions have waxed and waned. Yesterday the contract for December delivery of the yellow metal closed at $639 an ounce in New York, up $6.10.

George Vasic, equity strategist at UBS Securities Canada Inc., said
investors would do well to have some exposure to the gold sector,
particularly because the U.S. Federal Reserve Board’s recent pause
from a long string of successive interest rate hikes could well become a lengthy hold, given recent weak U.S. economic data.

“In the last two mid-cycle pauses, in 1995 and 1984, which are the
most comparable episodes to the present . . . if you look at the sectors in the TSX that performed well in the year that followed the end of Fed hikes, only the golds outperformed,” Mr. Vasic said.

They did so, moreover, even without the benefit of a weak U.S.
dollar, which, as it has for most of the past five years, tends to help drive up gold prices.

Council figures show that as in the first quarter, a key determinant
of supply and demand of physical gold during the second quarter was a
rash of gold “de-hedging” by gold mining companies, and, in particular, by Canada’s Barrick Gold Corp., the world’s largest producer since it
took over Placer Dome last year.

In an effort to capture more of the benefit from continuing high prices, Barrick and other miners have been paying to unwind futures contracts under which they had sold production forward at much lower prices.

The way the gold market works, this shows up as a reduction in
supply. In the second quarter, producers ditched the hedges on a total of 157 tonnes of gold, the council said, up from 142 tonnes in the previous quarter and from 75 tonnes in last year’s second quarter.

“That’s very high,” Matthew Turner, a London commodities analyst with
Virtual Metals Consulting Co. Ltd., said of the first and second-quarter figures. “It was mainly due to Barrick, which [has] basically wiped out the Placer Dome hedge book, all 7.7 million ounces.”

However, it is highly unlikely that this rate of de-hedging by
Barrick or any other producers will continue, Mr. Turner said, and this will “tend towards a lower price, because it means the supply will be higher.”

Supply could also increase if sales of gold by 15 European central
banks that are party to an agreement limiting such sales from their
reserves to a total of 500 tonnes a year return to more normal levels.

Council figures show the sales have been unusually light so far in
2006: 53 tonnes in the seconds quarter and 98 tonnes in the first, compared with 144 tonnes and 268 tonnes, respectively, in the oorresponding periods of last year.

As a result, Mr. Turner said that where the gold price is concerned
over the next while, “from a fundamentals point of view, I’d be more
bearish than bullish.”

— Jamie Kneen
Communications & Outreach Coordinator ofc. (613) 569-3439
MiningWatch Canada cell: (613) 761-2273
250 City Centre Ave., Suite 508 fax: (613) 569-5138
Ottawa, Ontario K1R 6K7 e-mail: jamie@miningwatch.ca
Canada http://www.miningwatch.ca

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