LONDON, Jan 12 (Reuters) - Gold producers, panicking in a volatile price climate, hedged 445 tonnes of production last year compared with 88 tonnes in 1998, industry consultants Gold Fields Mineral Services (GFMS) said on Wednesday.
GFMS said in an update to its Gold Survey 1999 released on Wednesday, that fears of further price declines after gold touched 20-year lows in the third quarter of 1999 led to record levels of producer hedging, including around 360 tonnes in the third quarter alone.
Gold's outlook for the first half of 2000 was more positive, with stronger jewellery demand and less producer hedging expected to tone down the price impact of central bank sales and speculative short selling.
The London-based consultancy said gold should average around $280.00 a troy ounce in the first six months of the year, trading in a range between $265.00 and $305.00.
Gold fell to its lowest in two decades in late August 1999 in the wake of Britain's first gold auction, which reinforced market fears of central bank sales.
But the market recovered to a two-year high in early October after 15 European central banks pledged in September to limit gold sales, lending and derivatives activity.
CHANGE OF DIRECTION
Paul Walker, a GFMS director, told Reuters central bank sales and the hedging activities of producers helped drive the price down to record lows in the third quarter of the year.
"I think it was panic hedging. We estimate that producers hedging added 360 tonnes to physical supply in the third quarter alone. When looking for an explanation of the price fall, it is a very important factor," Walker said.
The GFMS report said producers changed direction after the European central banks' announcement.
"Following the European agreement and the resulting price spike, producers changed direction and began large-scale restructuring and buy-backs of hedged production. GFMS estimate that overall in 1999 net producer hedging came to 445 tonnes," the update said.
It estimated that official sector sales were 441 tonnes in 1999, 399 tonnes of which was in the second half of the year.
"This includes a significant level of sales from outside of Europe, most of which are unlikely to be reflected in published official statistics," the update said.
OFFICIAL SALES SEEN ABOVE 10-YEAR AVERAGE
Gold's upside potential over the next six months will be constrained by the price elasticity of demand and a lack of investor buying interest.
"Little positive impact from the European agreement on gold is expected in the short term, supply of liquidity is adequate and official sector sales will be above the average level seen in the past decade," the GFMS update said.
World mine production increased by one percent to 2,569 tonnes in 1999, with output in the top five producing countries reducing on average by three percent.
Production costs for miners fell slightly, with average cash costs at $197 an ounce over the first nine months of the year.
Total fabrication demand recovered marginally in the second half of the year but the full-year figure was still down 1.4 percent on 1998, mainly due to lower gold use in jewellery while coin and electronics demand was up strongly.
Jewellery fabrication, which accounts for over 75 percent of world gold demand, was down last year, GFMS said.
"The estimated year-on-year decline of 2.8 percent (88 tonnes) can be attributed to the price spike in October, the legacy of past low oil prices and increased competition from gemset jewellery," the update said.

Can anyone verify the numbers in this report?
They are claiming $197 an ounce for 'production costs'.
Somewhere on this forum I have seen numbers $100 higher, this is a Huge difference that would affect gold mining companies profitability.

-- Possible Impact (posim@hotmail.com), January 12, 2000

Answers

$197/oz. is too low to explain hedging by the mining companies at recent levels. The $265 figure mentioned as a support level above is more likely equivalent to production costs.

-- Slobby Don (slobbydon@hotmail.com), January 12, 2000.

It varies country by country and mine by mine. I would say the mid 200's at a bare minimum. Remember that inflation will cause production costs to rise substantially this year.

-- Andy (2000EOD@prodigy.net), January 12, 2000.

Note it says "cash costs." Average cash costs are about $100 lower than total costs. Total costs include things like cost of acquiring mines and financing costs.

-- nobody (nobody@nowhere.com), January 12, 2000.

The figure of $197 is not too far off....that is the costs of getting the gold....

Now you have to add in the costs of keeping a business together with sales and marketing and other staff and insurance payments and taxes and...on and on.

Newmont Mining is a large American company who has excellent cost structures and they start to really get squeezed when gold trades at $260.

-- COINHOLDER (GOLDBUG@METALS.COM), January 12, 2000.