Investment demand to drive gold price up

Continuous growth in investment demand may push gold beyond the benchmark of $2,000 an oz by the year end, after possibly encountering a soft patch in the near future, a UK-based independent global consultancy, Gold Field Mineral Services (GFMS), said on Thursday.

Releasing the first update of its popular ‘GFMS Gold Survey’ in London, Philip Klapwijk, global head of metal analytics at Thomson Reuters GFMS (renamed after Thomson Reuters acquired GFMS), expected global investment demand was supporting the metal. The lack of resolution of sovereign debt matters and gloomy news on the economic front make this pro-gold environment likely to continue, he added.

After hitting an all-time record at $1,923.7 an oz on September 7 in Comex futures, gold slumped on profit booking to trade around $1,809 an oz.

The investment demand in all combined forms is estimated to reach a new record of just over 1,000 tonnes in the second half of the current calendar year, as compared to 624 tonnes in the same period last year. Considering the average price of gold at $1,815 an oz, the overall value of investment demand should swell to $60 billion in the second half of 2011, as compared to $29 billion in the first half.

“Some may think our first half figure sounds a little conservative but we should remember that early 2011 saw a wave of profit taking as the prior rally ran out of steam and equities were still enjoying a nice bull run. After that, investors’ behaviour has witnessed a sea change due to the intensification of the sovereign debt crisis. Not only did we have the threatened contagion from peripheral to core euro zone countries but, it also crossed the Atlantic in the form of the US credit rating being downgraded. Both these were critical to the surge in investment witnessed recently,” Klapwijk said.

Earlier, Marcus Grubb, managing director of the World Gold Council, had said, “The impact of the European sovereign debt crisis, the downgrading of US debt, inflationary pressures and the still-fragile outlook for economic growth in the west, are all likely to drive high levels of investment demand for the foreseeable future.”

Other factors felt to be significant, included the deterioration in world economic prospects in August, the maintenance of low interest rates (frequently negative in real terms), fears over the emergence of inflation in the industrialised world, a continuation of high levels of inflation in many emerging markets and the outbreak of conflict in North Africa and the West Asia.

The claim was supported by official sector purchases in the first half, which surged to over 200 tonnes from just 77 tonnes for 2010 as a whole. After leaving behind a period of heavy net sales, a short period of neutrality followed central banks’ gold performance. Now, in the likely third phase, heavy buying, is about to start. This will also lift investor sentiment.

Apparently, gold prices have also benefited immensely from resilient jewellery purchases. In the first half, the price of the yellow metal jumped 7.5 per cent year-on-year, despite a 25 per cent spurt in the period’s average price.

Much of these gains were attributable to India and China, mainly because of buoyant economies, bullish price expectations and troubling domestic inflation. On the flip side, scrap supply was relatively restrained, falling by just over seven per cent, due to optimism over imminent price gains and market stock depletion in some countries.