Gold is likely to remain bearish in the short term due to lower expectations from the third round of quantitative easing (QE3) in the US and gradual abatement of the euro zone economic crisis. But, the yellow metal may recover and set a new record in the long term.
The latest survey, released on Wednesday by Thomson Reuters GFMS, the global precious metals consultancy, forecast gold prices to fall below $1,550 an ounce in a month or two. The consultancy, however, reaffirmed its previous forecast, made last year, for the metal to hit $2,000 an ounce by the end of the current year. Gold fell below $1,600 early this year, but recovered later to trade currently at $1,658.9 in London.
Advising caution to investors, Philip Klapwijk, global head of metal analytics at Thomson Reuters GFMS, said, “The low price of $1,600 came as a surprise. It is quite possible that the metal falls even lower.”
Despite that, the consultancy is bullish for the medium term, said Klapwijk, adding, “We could easily see last September’s record high being taken out, and a push on towards $2,000 is definitely on the cards before December 2012, although a clear breach of that mark is arguably more likely in the first half of the next year.”
One of the main drivers of this reversal during the year was expected to be the resumption of acute fears over euro zone sovereign debt, with Spain set to be the new principal area of concern. Moreover, it was thought that over the next few months, the US recovery will begin to falter, which will force the Federal Reserve into taking additional monetary policy measures. Both developments were expected to lead to a period of further monetary easing and not just in the industrialised world, with China, India and Brazil becoming obliged to adopt additional loosening strategies.
“A corollary of all this monetary largesse is fear about resurgent inflation, and that becomes all the more likely if oil prices motor higher, should tensions get any worse between Iran and the US,” he said.
Many of the factors expected to fuel investor interest this year were present in 2011, with the Survey giving great attention to low or negative real interest rates and shaky equity markets, which, respectively, lowered the opportunity cost of holding gold and burnished its safe haven credentials.
Despite that, total investment actually dipped last year in tonnage terms, as selling centered on the futures and over-the-counter (OTC) markets, which stemmed from liquidity squeezes, profit taking and technical selling, outweighing a bumper year for physical investment. Such buying, however, actually meant that, in approximate value terms, net world investment rose a healthy 15 per cent to a record level of just over $80 billion.
Investors were also inspired by the turnaround in central bank activity, as official sector purchases last year shot up to just over 450 tonnes. This growth was mainly ascribed to a further year of trivial sales by signatories to the Central Bank Gold Agreement and heavy purchases elsewhere by those keen to diversify dollar reserves, a development also felt likely to feed through sizable acquisitions this year.
The fact that jewellery fabrication fell only two per cent in 2011 demonstrates marked resilience in the face of soaring prices. “Gold was clearly dependent on emerging markets’ economic strength, as China’s jewellery demand grew to a record level, while India’s fell by less than three per cent,” he added.
Heavy Western losses in jewellery were replicated in their inverse by a major rise in these countries’ jewellery scrap, as sellers were motivated by high prices, economic problems and ease of recycling. In contrast, due to such factors as price acclimatisation and bullish sentiment, scrap from traditionally price-sensitive areas fell, in doing so dragging down the global total by three per cent.
Meanwhile, global gold mine production shot up by three per cent, representing the third year of gains. “It seems evident that the mining sector is deriving clear benefits from a decade of rising prices, as this has given us a healthy pipeline of new projects coming on stream, and high absolute prices, as that means several mature operations are staying productive for longer than would otherwise have been the case,” he added.
There was a larger change in tonnage terms for producer hedging, as this swung from net de-hedging of 108 tonnes in 2010 to a small positive last year. However, this does not represent a sea-change in attitudes towards hedging and instead represent ongoing project hedging and the small scale these days of the legacy position.
