Gold

Gold closed at $891.30 in New York yesterday and was up $6.90; silver closed at $17.31, up 26 cents. Since then gold has again traded in a range between $885 and $895 in Asian and in early European trading this morning.

Gold rose in early trading in Europe when oil prices rose on news that Anglo-Dutch oil giant Shell had halted production at a major offshore oil facility in Nigeria because of a militant attack. It has since given back those early gains and dollar strength this morning seems to have led to a sell off in gold.

While oil has also since given up its early gains it is important to remain aware of the risks to oil production in Nigeria. Violence in the southern Delta region has reduced Nigeria’s total oil production by a quarter since January 2006. In a separate development on Thursday, the Movement for the Survival of Ogoni People (MOSOP) reported an oil spill at a disused Shell facility in the Ogoniland region of the Delta. MOSOP spokesman Bariara Klalap said that crude oil had seeped into surrounding villages and called on Shell to contain the spill. Community unrest sparked by poverty and pollution from oil production forced Shell to halt its activities in Ogoniland in 1993.

With the supply/demand balance very tight, geopolitical risk remains significant and ever present in the oil markets as seen in Nigeria this morning. Supply disruptions from some critical oil producers such as Nigeria, Venezuela or Iran will likely result in markedly higher oil and consequently gold prices. Hurricane season could also negatively effect oil and gas fields in the Gulf of Mexico.

South African Gold Production Down Sharply

The gold market, like the oil market is facing similar supply issues despite robust demand. This morning comes the news that South African gold output fell 10.1 percent in volume terms in April compared to the same month last year. South African gold production has fallen sharply after state-owned power utility Eskom struggled to provide sufficient power to mines, following a near collapse in the electricity grid in January, which led to a five-day countrywide mine shutdown.

Eskom have admitted that the power and electricity problems are a major challenge and may take years to rectify which would likely result in further falls in gold production in South Africa.

In the medium to long term, the combination of strong international safe-haven demand and decreasing production and supply of gold in most major producers and particularly in South Africa will likely result in gold going significantly higher in the coming months.

Importantly, South African production of gold was over 1,000 tonnes per annum in 1970 and has been steadily declining to nearly 250 tonnes per annum today.

Similarly, in Australia, gold production recently slumped to its lowest level in almost 20 years. Mining consultant Surbiton Associates says gold output for the March quarter was down 10 tonnes to 53 tonnes. Gold production in March 2008 fell to seven tonnes, 12 per cent less than the comparative period for 2007, while the total output for the quarter was 53 tonnes, a drop of 16 per cent on the previous quarter.

Australian gold production reached a peak of 314 tonnes in 1997. In 2006, Australia’s gold production fell 5 percent to 249 metric tonnes from 263 tonnes in 2005. This was the worst production performance in 13 years. Since 1997 production has declined largely due to a lack of new discoveries.

Scientists have acknowledged the reality that the world’s finite natural resources, including its precious metals, are being used up at an unprecedented rate. The respected New Scientist has reported on it, especially in its ‘Earth Natural Wealth: An Audit’ report. The Wall Street Journal has also reported (‘A Metal Scare to Rival the Oil Scare’) how man’s voracious demand for the earth’s natural resources may lead to us ‘running out’ of some of them: “Scientists who have tried to estimate how long the world’s mineral supply can meet global demand have made some gloomy predictions.”

This is especially the case with the unprecedented movement of billions of people in BRIC and other emerging economies moving from ‘peasant class’ to middle class in one of the greatest social and economic transformations the world has ever seen. In the same way that peak oil has been recognised in recent years so too will the reality of peak gold be realised in the coming years when the price of the earth’s precious finite metals, such as gold, likely rise to multiples of their current value.

Silver

Silver is trading at $17.20/17.26 per ounce (1200 GMT).

PGMs

Platinum is trading at $2069/2079 per ounce (1200 GMT).
Palladium is trading at $465/470 per ounce (1200 GMT).