Gold to hit new record in coming months, may exceed $1,100/oz on investment boom – GFMS

April 7th, 2009

By Perrine Faye

Gold prices could hit a new all-time high in coming months and potentially exceed the $1,100 an ounce mark, as an investment craze stemming from the financial crisis will offset weak fundamentals, metals consultancy GFMS said on Tuesday.

Gold "could easily re-attain the $1,000 mark and may well push up towards and perhaps even through the $1,100 barrier," chairman Philip Klapwijk said at the launch of GFMS' annual market review, Gold Survey 2009.

Spot gold has erased all gains recorded during the first quarter of this year, when it briefly touched the crucial $1,000 barrier on February 20 on strong investment demand. It was recently at $880 an ounce, around the level at which it started the year. Its all-time high was set at $1,032.60 an ounce on March 17, 2008.

"The price may have pulled back a fair bit from the February highs but that was largely just the market’s reaction to jewellery demand crumbling and scrap (supply) booming. It’s far from game over for investors and it will be that crowd which sets the price alight," Klapwijk said.

The fiscal and monetary policies currently being enacted to tackle the financial crisis, especially in the US, is the root cause of gold’s potential according to GFMS, as they can generate inflationary pressures, against which central banks will be reluctant to fight through higher interest rates as long as economic prospects remain shaky.

GFMS also believes that the US dollar, which has gained over five percent versus the euro so far this year, should pull back in coming months as foreign investors may refuse to continue financing an explosion in US government debt.

However, the consultancy warned that gold's rally "may well not be a straight line as a summer lull or the need for inflationary pressures to build could mean sub-$900 prices in the short term."

Implied net investment soared by nearly 76 percent in 2008, with a significant amount of support arising from record inflows into gold exchange-traded funds (ETFs) and other physical products like bullion bars and coins during the year, while speculative players exited the market to cover losses in other global assets, especially after the collapse of Lehman Brothers in September.

INVESTMENT BOOM TO OVERCOME WEAK FUNDAMENTALS GFMS' projections assume that investment will be buoyant enough to offset ongoing weak fundamentals, as although mine output and central banks' sales are easing, physical demand is plummeting, scrap supply is growing and producer de-hedging is fading.

"Strength in investment will certainly be needed to overcome weakness in the fundamentals," GFMS admitted.

GFMS expects fabrication demand to fall further this year on the back of even weaker jewellery demand, due to the economic downturn and projections of record high prices.

Total fabrication demand fell by seven percent to 2,850 tonnes last year, its lowest level since 1988, largely due to a 10-percent slump in jewellery consumption as a result of high and volatile prices together with the financial crisis. India was the worst affected in volumes, with a fall of almost 100 tonnes, while the US jewellery sector fell by nearly a third to its lowest level on record and in Italy it dropped for the tenth consecutive year, GFMS said.

On the supply side, global mine production fell by a moderate 3 percent in 2008 to the lowest level since 1996, with the largest drop seen in Indonesia, (35 percent), followed by South Africa (14 percent) and Australia (13 pct). Cash costs increased by nearly 20 percent.
However, global scrap supply surged by 27 percent last year to a record high over 1,200 tonnes and has remained strong throughout the first quarter of 2009, largely because of distress selling by individuals, although retailers and manufacturers also melted larger quantities of unsold jewellery.

Meanwhile, producer de-hedging, a source of physical demand, absorbed 358 tonnes of gold last year, but with outstanding gold hedges amounting to less than 500 tonnes at the end of 2008, "the scope for producer de-hedging to provide meaningful demand is becoming increasingly limited," GFMS said.
Finally, GFMS warned that net official sector sales should fall further this year after plummeting by 49 percent to just 246 tonnes in 2008. Central Bank Gold Agreement signatories should sell at a rate similar to last year's 358 tonnes, which was far under the 500-tonne annual quota, while other countries may increase their holdings, although large-scale and direct purchases by central banks in the open market seem very unlikely this year, said GFMS.

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