Gold to hit $1,600 on good fundamentals

Rising investment and jewellery demand, global inflationary concerns may push prices up, says GFMS chairman.

Gold prices are likely to break through $1,600 an ounce benchmark before the end of the current year on favourable fundamentals. Rising investment and jewellery demand, global inflationary concerns and the government’s lack of interest in tightening monetary policy significantly may push prices up, said Philip Klapwijk, chairman of the London-based independent precious metals research consultancy GFMS Ltd.

According to a recent report by the World Gold Council (WGC), gold demand in 2010 reached a 10-year high of 3,812.2 tonnes which was mainly attributed to rising demand from investment and jewellery sectors. Demand growth was mainly due to the revival of the Indian market and strong momentum in Chinese gold demand.

While releasing “Gold Survey 2010” in London on Wednesday, Klapwijk said, “Gold investment demand last year continued to drive prices higher, which rose by 26 per cent in 2010 (on annual average basis).”

Over the year as a whole, WGC estimated investment demand of 1,333.1 tonnes broadly stable, just two per cent down than 2009 record levels. A 45 per cent fall in both the ‘ETFs and similar products’ and ‘OTC investment & stock flows’ segments more than outweighed a 56 per cent rise in physical bar investment, notwithstanding that the relative decline in these two elements was largely due to exceptionally strong levels of demand in 2009. Annual demand for ETFs and similar products was 338 tonnes. Although this was the second highest annual figure on record, it was nevertheless 45 per cent below the 2009 peak of 617.1 tonnes.

The jewellery sector, meanwhile, had the strongest recovery in 2010, with annual demand 299 tonnes (17 per cent) higher than in 2009. Indian jewellery demand rose 69 per cent during the year to 746 tonnes, while China’s jewellery demand reached a new annual record of 400 tonnes.

Global investment actually fell compared with 2009, but last year’s performance was still comfortably the second-highest on record. Furthermore, in value terms, world investment last year did set a new high. According to the survey, the performance was not entirely one-way. ETF holdings experienced the second highest annual gain, while combined purchases of bars and coins surged last year. In contrast, investor interest in the futures market was scaled back in 2010, having peaked early in the fourth quarter.

Support for higher gold prices was, however, not restricted to developments in the investment sector. “We last year saw signs of the gold market having adjusted to higher prices. While jewellery demand partially recovered, following steep losses in 2009, scrap supply was little changed, even though gold prices posted a series of record highs in 2010,” Klapwijk said.

Much of the lift in jewellery demand was in fact concentrated in just India and China, which benefited (respectively) from positive price expectations and a still robust economic backdrop. Surprisingly, many key jewellery consuming countries including the US, EU and the West Asia, remained net suppliers of gold to the international gold market. Each of them saw scrap supply exceed jewellery consumption in 2010.

With improvement in global jewellery demand, the swing to net purchases was witnessed by the official sector in 2010, for the first time since 1988 mainly due to extremely low sales by the Central Bank Gold Agreement (CBGA) signatories, combined with rising purchases outside the agreement. In fact, the net total would have been considerably higher last year in the absence of the IMF sales programme, which was completed towards end-2010.

Prospects for gold prices this year remained bright, added Klapwijk. Investors continued to be concerned about the outlook for inflation, with governments in general showing little appetite to tighten monetary policy significantly. And, with the spotlight also shining on the state of government finances, there is every reason to believe that investors will remain focused on the gold market. Furthermore, growing price acceptance by consumers will help lift jewellery demand, while generating only a muted response from scrap. Together, these will help raise the support level in the gold market and provide a firm platform for investors to take gold higher, he added.