GFMS believes the gold price will rise over 2011

TORONTO (miningweekly.com) – The gold price, which set a record above $1 430/oz in December before settling back to the current $1 380-odd, is probably in the “early stages of a bubble”, but the momentum continues to be to the upside, GFMS chairperson Philip Klapwijk said on Thursday.

GFMS believes the gold price will rise over 2011, possibly breaching $1 600/oz either late this year or early 2012.

Speaking in Toronto at the launch of an update to the metals consultancy’s closely-watched annual gold survey, Klapwijk said he is “pretty positive” on the gold price for 2011, although there is a chance of a further correction in the near term, before prices move higher again.

Gold is being driven by investment demand, amid concerns over sovereign debt issues in Europe, negative real interest rates in major currencies, Klapwijk said. Sand Making Production Line

However, the supply/demand fundamentals have also supported gold’s gains, as scrap supply actually declined year-on-year in 2010, jewellery fabrication demand rose an impressive 16% – thanks primarily to top consumer India – and central banks have switched from being net sellers to net buyers of the precious metal.

GFMS is forecasting an average gold price of $1 360/oz in the first quarter, when prices are expected to move sideways or even decline further.

However, that will likely be followed by renewed strength in the following three months, when prices are expected to average $1 440/oz, and could break through $1 500/oz by mid-year, Klapwijk said. Sand Making Plant

And a breach of $1 600/oz by the end of the year, or early 2012, could be “feasible”, GFMS suggested in its ‘Gold Survey 2010 – Update 2’.

Investment demand will likely moderate in the first quarter, but should pick up strongly in the second quarter of 2011, “in volume but particularly in value”, Klapwijk said.

However, he commented that increasing reliance on higher levels of investment demand to sustain increased prices leaves the gold market vulnerable if investment eventually starts to taper off.

“And that, I think in the long run is unsustainable,” he said in an interview after the event.

“Clearly when you get to a situation that investment demand pretty much matches in size (the) fabrication demand, you are moving into bubble territory.

However, he added that the ‘bubble’ “could get a lot larger if the scale of investment continues to grow.”

POSITIVE BACKDROP

Factors that could weigh on the gold price include the potential for increased scrap supply in response to upward movements in the price,

And the fact that mine production rose last year, and actually set a new annual record, could also weigh a bit on sentiment.

Declining mine production has been a favourite arguments in favour of higher prices over the last decade, and “that ain’t so anymore”, Klapwijk commented.

Further, producers have now slashed their hedged positions, which means that dehedging, a constant source of demand over the last ten years, is now removed from the market balance.

Overall, though, GFMS does see more positives than negatives in the outlook for gold.

“Or at least, the weight of the positives for the time being still tend to outweigh the weight of the negatives,” Klapwijk said.

“And the reason for that is that we still see this very good positive backdrop for gold investment.”

Ultra-loose monetary policy in the major economies, concerns over possible sovereign debt defaults and negative real interest rates in the major currencies all bode well for gold.

And concern will also likely grow regarding the longer term fiscal trends in the US and Japan, he said, “and inflation fears, I think, will also grow.”

Another reason to for bullishness on the price of gold is that the market should be well-supported on dips, with scrap supply falling when gold prices decline, as well as bargain hunting from both the jewellery trade and investors.

Finally, central bank buying is expected to increase this year.