GFMS: Gold to pass US$1600 in 2011

The following was released by GFMS and outlines the highlights of its Gold Survey 2011. The summary draws from a briefing given by GFMS chairman Philip Klapwijk in London. For more information and to buy the full report visit www.gfms.co.uk.

Gold investment demand last year continued to drive gold prices higher, which rose nearly 26% in 2010 (on an annual average basis). As Klapwijk noted, “Global investment actually fell compared with 2009, but last year’s performance was still comfortably the second highest on record. Furthermore, in value terms, world investment last year did set a new high.” An analysis of investment flows in Gold Survey 2011 reveals that the performance was not entirely one-way. Exchange-traded-fund holdings experienced the second highest annual gain, while combined purchases of bars and coins surged last year. In contrast, investor interest in the futures market was scaled back in 2010, having peaked early in the fourth quarter.

Support for higher gold prices was, however, not restricted to developments in the investment sector. As Klapwijk points out, “Last year we saw signs of the gold market having adjusted to higher prices. While jewelry demand partially recovered, following 2009’s steep losses, scrap supply was little changed, even though gold prices posted a series of record highs in 2010.” Much of the lift in jewelry demand was in fact concentrated in India and China, which benefited (respectively) from positive price expectations and a still robust economic backdrop. Even so, the report highlights that many key jewelry consuming countries remained net suppliers of gold to the international gold market. Notable casualties of this trend included the United States, the European Union and the Middle East with each seeing scrap supply exceed jewelry consumption in 2010.

As well as the improvement in global jewelry demand, Gold Survey 2011 captures the swing to net purchases by the official sector in 2010, for the first time since 1988. This performance was due to extremely low sales by Central Bank Gold Agreement (CBGA) signatories, combined with rising purchases outside of the CBGA. In fact, the net total would have been considerably higher last year in the absence of the International Monetary Fund sales program, which was completed towards end-2010.

In terms of the producer community, world mine supply posted another solid gain in 2010. Although the full-year improvement, described in the Gold Survey, fell short of 2009’s performance, this still saw the global total post a record high, with every major producing region contributing to last year’s higher total (the first time this has occurred since 1988). Even so, this outcome failed to dampen investor sentiment, as did a further decline in producer de-hedging. An uninterrupted period of 11 years of de-hedging has therefore seen the global hedge book by end-2010 fall to its lowest level since the 1980s. As Klapwijk said, “producer de-hedging has been a constant feature on the demand side of the gold market since 2001, at times providing strong support to the gold price. However, this role has now all but come to an end.”

Further commenting on the outlook for 2011, Klapwijk noted, “the prospects for gold prices this year remain bright. Investors continue to be concerned about the outlook for inflation, with governments in general showing little appetite to tighten monetary policy significantly. And, with the spotlight also shining on the state of government finances, there is every reason to believe that investors will remain focused on the gold market. Furthermore, growing price acceptance by consumers will help lift jewelry demand, while generating only a muted response from scrap. Together, these will help raise the support level in the gold market and provide a firm platform for investors to take gold higher. Overall, we would not be surprised, therefore, to see gold break through US$1,600 (per oz.) before the end of the year.”