“We have to start viewing $1 000 as a clear possibility for later this year,” precious-metals consultancy GFMS said on Thursday.
Releasing its Gold Survey 2007: Update 2, the consultancy projected an average gold price of $840 an ounce over the first half of 2008 with further increases possible later in the year.
“Investor appetite for gold at the moment seems undimmed and this should push gold higher over the year,” said GFMS executive chairperson Philip Klapwijk. “Predicting the top is never easy, but we always thought the $900 barrier could easily fall quite soon and then we have to start viewing $1 000 as a clear possibility for later this year.”
GFMS expects the surge in investment to be driven by those factors that fuelled the boom witnessed in the final four months of 2007. These are a weak dollar, record oil prices and its inflationary consequences, the United States subprime crisis and its threat to GDP growth in the US and perhaps elsewhere, as well as geopolitical tensions.
“It’s far easier to argue that we’re at the start of a period of higher inflation and lower US growth, rather than we’re emerging from the worst. All that is strongly pro-gold moving forward,” said Klapwijk. “And we can easily see higher gold prices without fireworks in the Middle East or Pakistan, though any political drama there or elsewhere is highly likely to rally the price yet further.”
GFMS does caution, however, that a short- to medium-term correction is possible, chiefly as a result of the speed of the recent price rise and the huge fund overhang on Comex.
Should a retreat occur, it is thought a slide back to the low $800s might occur, partly as physical buyers are not expected to rush back in the face of such price volatility at elevated levels.
Klapwijk said this temporary fallback explains why GFMS’s forecast average for the first half at $840 could seem a bit low in light of current levels.
“But that’s still up almost 30% year-on-year and, with this period of consolidation out of the way and the funds in a position to expand their net long again, that’s when we should see the convincing drive towards $1 000,” he noted.
High prices and volatility are the two chief reasons that the consultancy expects fabrication to slump by almost one-fifth in the first half of this year.
Less marked gains for local prices due to dollar weakness and continued robust GDP growth in many emerging economies are expected to mitigate partially the effect of the expected gold rally.
It is because of these factors that GFMS sees the “jewellery floor” — the level deemed fair and sustainable at which physical buyers return — as having moved up to the low $800s.
However, the consultancy doubts the solidity of prices moving forward, given the huge volumes investors would have to pick up to keep the market in balance as jewellery demand slips well under mine production.
GFMS’s report also outlines how there is little else on the demand side to push prices higher.
Producer dehedging, for example, is expected to contract sharply in the first half of 2008 to levels roughly one-third of those a year prior.
Given the GFMS estimate of the hedge book now being under 1 000 tonnes, the scope for support from this area is therefore becoming limited.
Few signs are at least said to have been seen of any desire by producers to undertake any major fresh hedging, said GFMS.
The consultancy still believes that gold investment could easily drive prices higher with poor demand elsewhere thanks to a relatively limited supply reaction.
Mine production is forecast to increase in 2008, but by only a few percent.
In contrast, official sector sales are expected to slip primarily because of changes to sales by signatories to the Central Bank Gold Agreement, while gross purchases outside this group are expected to remain modest.
“We’re not expecting any of the major US dollar holders to appear on the buy side in a major way any time soon. But any whiff they were about to would no doubt be interpreted as strongly bullish,” said Klapwijk.
The only major supply response that GFMS expects is for scrap, though even with the consultancy’s forecast 15% rise, first-half 2008 volumes would remain well under the first-half 2006 record.
This illustrates just how much near-market supply has already appeared and how high price expectations have already risen. — I-Net Bridge