Gold may gain over 23 per cent to achieve a fresh all time high of $1000 an oz in the first half of 2009 as net investment demand surges from retail investors who are motivated to own yellow metal because of fears over the string of bank failures and stresses in the broader global financial system, forecasts Gold Fields Mineral Services Ltd (GFMS), the London-based independent consultancy and research company.
Currently quoted at $812 an oz, the yellow metal hit the historic high of $1011 an oz on March 17, 2008 on sustained safe haven buying from investors and consumers.
Philip Klapwijk, GFMS’ executive chairman expects renewed price strength during this year on a combination of aggressive fiscal policy and short term interest rates at historically low levels in the US and other major economies are set to result in a resurgence of inflationary threats.
Additionally, as foreign creditors grow increasingly alarmed over the burgeoning US fiscal deficit and the country’s monetisation of debt, there is a potential for official inflows into the US government debt market to weaken, an event that would substantially undercut support for the dollar. This, coupled with the ongoing environment of negative real interest rates should prove highly supportive of gold.
Furthermore, as the global economic downturn continues to erode corporate earnings interest in alternative assets may again be bolstered basis the deteriorating backdrop for equity markets, the consultancy feels.
Once fund selling linked to investor redemptions and the like abates, a portion of the large amount of capital that is presently sidelined could well be invested in gold amidst a rise in fresh speculative interest.
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Apparently, the divergence between the ‘paper’ and physical markets became particularly pronounced after the collapse of Lehman Brothers in September. GFMS believes that this wave of new investment will possibly be fueling the price rally.
A section of investors mainly in Europe and North America primarily retail and high networth individuals have been masked by heavy fund redemptions as cash has been sought to cover losses elsewhere, meet margin calls and so forth.
“If it hadn’t been for this fund selling, we’d be easily back over $1,000 by now and, as soon as it quietens down, I’m sure a strong rally is going to emerge,” Klapwijk added.
Gold’s fundamentals, though, remained relatively neutral in the near term, with the damage from weak demand being largely neutralised by restrained supply. Scrap in the first half of this year, for example, is only forecast as broadly flat year-on-year and official sector disposals are expected to continue falling.
The yellow metal’s selling will be dominated by the signatories to the Central Bank Gold Agreement (CBGA) and that buying by banks outside this group will remain limited, with no hint made of any purchases by the big dollar holders in East Asia.
On the demand side, high and volatile prices plus the slowdown in world gross domestic products (GDP) growth were forecast to cut jewellery demand by 11 per cent to its lowest level since 1989 due to high and volatile prices.
However, other fabrication rose by 2 per cent, entirely as a result of a rise of over 40 per cent for official coins as all the remaining areas saw losses, chiefly through economic malaise and high gold prices. Implied net investment grew by around 20 per cent to a little over 200 tonnes in 2008.
“An 11 per cent drop may sound restrained to some but demand in the first half of last year was fairly feeble and the actual tonnage we are proposing for this year could easily be a 20-year low,” Klapwijk added.
Jewellery offtake was also estimated to have declined by 11 per cent in 2008, chiefly due to the damage from high and volatile prices, especially in the developing world, and the slide into recession in many countries particularly in the US.