The price of gold could hit $1,600 an ounce if crude oil goes to $100 a barrel in the next six to 18 months, the chief executive of South Africa's Gold Fields, the world's No. 4 gold producer, said on Wednesday.
"Some people say oil is going up to $100 a barrel in the next six to 18 months. If that's true, and if you look at the long-term relationship between gold and oil, you should find that gold would go to $1,500 to $1,600," Gold Fields CEO Nick Holland told Reuters in an interview during the Denver Gold Forum.
Holland also attributed his outlook to dwindling industry supply as a result of declining quantity and quality of exploration discoveries.
"The bias is more to the upside than the downside at this stage," he said.
Gold hit an 18-month high on Wednesday, rising above $1,020 an ounce as the dollar's slide to 2009 lows against the euro sparked buying of the metal as a hedge against currency risks. Also supportive was oil's rise above $72 a barrel on a larger-than-expected decline in U.S. crude stocks.
Gold is often used as a hedge against inflation, and because of that, oil and gold typically move in the same direction.
Asked what gold north of the $1,000-level meant for gold producers, Holland said, "It just means that we make more money.
"One of the things that we don't want to do is drop our cut-off. I want to make sure that we maintain discipline of how we mine. I don't want to suddenly let the guys mine low-grade material that may not necessarily add value to the portfolio," he said."
Holland said that one of problems for the gold sector in the past had been that costs spent on mining lower-quality gold ore tended to rise in tandem with higher gold prices, and that hurts profitability.
"In order for us to re-look at the cutoff and new opportunities, we probably have to see a sizable increase in gold prices. We have to see gold going to $1,500," Holland said.
Holland said that the company's cost base was declining, and he continued to expect production to offset costs.
NO RUSH FOR ACQUISITIONS
Asked if Gold Fields would use any excess cash flow for acquisitions, Holland said, "They would have to be very attractive for us to that. We don't really have to do acquisitions. We don't have to rush out and overpay for other answers, but I will never say 'never.'"
He added that he was comfortable with the current gold reserves and project pipeline of the company, which operates in South Africa, Ghana, Peru and Australia.
Holland still pegged annual exploration costs at $120 million in spite of the gold rally.
Asked if Gold Fields would increase dividends to shareholders, Holland said he would only do so "if we had no better way to spend the money, let's assume that we can't find projects that give us good return, rather than let it sitting in the bank."
In terms of output, he still expected the first quarter to match that of the fourth quarter of 906,000 ounces, and he stood by his production forecast for fiscal year 2010 of between 3.7 million ounces and 3.8 million ounces.
Holland's long-term forecast was to produce 5 million ounces in five years.
Gold Fields is the second largest Africa-based miner behind AngloGold Ashanti.
