Untitled - PRIME Gold

80NORILSK NICKEL • ANNUAL REPORT •200581GOLD MINING ASSETS OF MMC NORILSK NICKEL(Polus)9••• Review of marketdevelopments9.1Review of gold marketdevelopments in 2005Today, gold is no more a legitimate means of payment in mostdeveloped countries, yet a special attitude to this metal remains.Gold still serves as the guarantor of stability and preservationof wealth both for private individuals buying jewelry and forinvestment institutions and countries. The main consumer ofthe gold produced is the jewelry industry, using two thirds ofthe gold output.Gold end users in 2005Source: BMO Gold Book, 2006In 2005, the average annual price for gold increased by 8.3%and amounted to USD 444 per ounce, hitting the annualrecord (USD 537 per ounce) on 12 December 2005. Due toa sharp increase in gold sales from government reserves, highgold prices, and a reduced volume of gold sales under hedgecontracts, there was a surplus of gold on the market by theend of the year estimated at 7.3 million ounces.The trend for high gold prices keeps due to further weakeningof the US dollar against the background of interest rateincrease and growth of the US budgetary deficit. Growth ofenergy prices has a controversial effect: on the one hand,they instigate inflation, and hence, gold price growth, andon the other – increase gold production costs. In early 2006,experts of the US Department of Energy, among the mostconservative in the industry, increased their oil price forecastfor the period from 2006 to 2007 up to USD 50 – 60 per barrel,and from 2008 to 2030 up to USD 43 – 50 per barrel.These factors are expected to play an even more significantrole in 2006 as we have seen no world-class projects for newgold field development over the last several years. Other factorsaffecting gold price include sustaining investment demandfor gold from investment funds and growing jewelry marketsin India and China, which are the main consumers of gold now.In addition, the US saw a considerable increase in interesttowards gold with consumption growing by 7%.GOLD MINING ASSETS OF MMC NORILSK NICKEL(Polus)9In 2006, gold prices may continue to grow also due to thedemand from hedge funds willing to diversify their investmentportfolios. An important factor in gold price growth isthe excess of demand over supply. Despite the fact that in 2005the gold supply exceeded the demand, the GFMS and DeutscheBank analysts expect a significant change in the gold marketin the short and medium term and a growth of the negativebalance between demand and supply to reach 213 tonnesby 2010.