Lofty gold price resting on investment demand only, GFMS warns
Gold consultancy GFMS Ltd. is maintaining a solid outlook for bullion this year, but also warning of a potential retreat not far down the road.In its closely watched annual gold survey, released yesterday, London-based GFMS said that gold could quickly rebound back above US$1,000 an ounce in 2009, and a move to US$1,100 is also possible as investors seek a safe haven amid the ongoing economic turmoil.But contrary to the popular views of the gold bugs, GFMS does not see the boom lasting indefinitely. It reiterated a long-held view that this rally is entirely driven by investment demand and is not backed by jewellery demand or anything else. The result is plenty of short-term volatility as investors jump in and out."How long [the rally] is sustained will be a function of what happens in the financial sphere. Specifically the U. S. dollar, inflation, oil prices, and what happens in the equity markets. Some of that is very difficult to predict," GFMS research director Neil Meader said in an interview after a presentation in Toronto.If the global downturn moderates, inflation is held in check and the U. S. dollar maintains its strength, Mr. Meader said a retreat is possible in 2009 or early 2010. But if the U. S. dollar collapses, inflation runs wild and the world plunges into depression, he expects a "sustained phase of gold investment" that will run into 2011.And even when the gold market does weaken, GFMS is not anticipating a total collapse."We do expect that the retreat from investment could be very slow. People do seem to take time to become convinced that the game has changed," Mr. Meader said.The gold survey also showed that mine supply in 2008 took another dip, falling 62 tonnes to 2,416 tonnes. That is the lowest production level in the industry since 1996, and proof that mining companies are having trouble boosting production as they deal with high costs, geopolitical risk, and a lack of new discoveries. The biggest weakness continues to be in South Africa, where production is falling at the fastest pace in more than 100 years.However, total demand also fell about 1% to 3,880 tonnes, as the 75.5% increase in net investment demand could not totally offset the 10.2% decline in jewellery demand. GFMS expects the weak jewellery demand will continue throughout this year, although some buying on price dips is likely.Gold briefly topped US$1,000 in February, but fell back below US$900 in recent days as the equity markets rallied. In inflation-adjusted terms, gold is still nowhere near its high of more than US$2,200 an ounce in 1980.