Gold continues to shine

By John Miller, Editor

Despite economies around the world recovering slowly from the Global Financial Crisis, gold remains an investment cornerstone with high prices, increasing demand and steady supply.

Most gold industry experts predict that gold will continue to remain strong through the rest of 2010 and well into 2011, with prices remaining above US$1100 an ounce.

In launching the 14th Chinese language version of its annual ‘Gold Survey’, GFMS chairman Philip Klapwijk says he expects an increase in supply in 2010 due to the IMF program boosting overall official gold sales, in spite of some buy-side interest elsewhere, and further growth in mine production, albeit by less than 2009’s 7% gain, which together would offset a marginal drop in global scrap supply.

With gold’s demand side, GFMS says fabrication demand, which is dominated by jewellery, is forecast to recover some of the ground lost in 2009, although year-on-year growth is expected to slow in the second half of 2010 due to higher gold prices.

It says the market will, therefore, remain in a substantial surplus in 2010. With limited scope for de-hedging by producers, the gap between supply and demand will have to be filled by investors, who so far this year have considerably increased their holdings of gold in the form of ETFs and physical bullion.

In the second half of 2010 GFMS expects investment demand to be volatile but overall to remain on a positive trend due to ongoing concerns about the long-run value of major currencies, particularly in the light of continued ultra-low short-term interest rates and the increase in government debt levels.

In GFMS’ view the growth expected, especially in value terms, of investment demand will probably be sufficient to drive prices above the $1300 mark during the remainder of 2010.

It says this process will be aided by physical markets, to some extent at least, adjusting to higher price levels, as indicated by the rebound in fabrication demand and the drop in global scrap supply in the first half, in spite of considerably higher average US dollar gold prices.

However, the consultancy cautions that there is still scope for downside over the next few months if investment demand temporarily falters, although in the absence of a major change in the economic outlook, it is felt that gold will now be well supported at prices between $1150 and $1200.

Philip Klapwijk comments, “Even though progress is dependent on yet higher inflows from investors, economic conditions still seem to favour such growth in investment over the balance of this year and, indeed, they probably will continue to do so well into 2011.

“Nevertheless, it should be borne in mind that especially with inflation low in all the major economies and given the tough fiscal measures now being introduced in many countries, any serious tightening of monetary policy in the United States and Europe would quickly transform the outlook for investment and the gold price, even if that possibility currently appears rather remote.”

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