GFMS: Economic uncertainty will drive gold to record levels

The positive climate for gold investment will continue until late 2008 and quite likely into the first half of 2009, according to GFMS, the London-based precious metals research consultancy.

“It’s possible we have seen the lows for this year and prices could be moving higher,” Neal Meader, research director of GFMS told a group of analysts and investors at the recent Toronto launch of the consultancy’s annual review of the gold market.

Gold prices will remain strong for another 12 months and investor interest could drive prices to a high “comfortably north of the US$1,000 (per oz.) mark.”

But he also cautioned against what the GFMS team has described as “irrational exuberance.”

“It’s possible we will get to US$1,100 but it’s unlikely we’ll see the higher figures of US$1,200-1,800 that people have been talking about.”

In the medium term, prices “could move sideways or even retrace a little more: The mid- US$800s are a possible low for the rest of the year, with prices below that level most likely to be bid up by bargain hunting and stock replenishment,” he said.

Gold will continue to fulfill its classic role as a safe haven this year with concerns over the ongoing credit market crisis, the U. S. dollar, mounting inflation, and high energy prices sustaining the current mood of risk aversion and growing fears about the economy.

This year GFMS anticipates mine production and official sector sales will be flat.

Looking back on 2007, investments in exchange-traded funds (ETFs), futures and physical metal all enjoyed marked inflows over the course of the year, GFMS reported in its Gold Survey 2008.

Investment in the yellow metal displayed tremendous growth during the September to December period, but demand during the rest of the year was flat.

Meader explained a 61% decline in implied net investment to 158 tonnes was largely driven by net selling in the over-the-counter market.

Highlights on the supply side of the equation included falling mine production, rising cash costs and official sector sales, and declining scrap.

Global mine production fell 0.4% or 10 tonnes, pushing output to an eleven-year low in 2007. Africa witnessed the biggest decline (29 tonnes) due to a variety of problems in South Africa, but output in North America and Latin America also dropped significantly.

Production in North America fell for the seventh year in a row, while Latin America registered a near-23 tonne collapse despite gains in Brazil, Mexico and Guatemala, the survey found.

China and Indonesia helped fill the gap, with China toppling South Africa from its perch as the world’s leading gold producer. China recorded a 33-tonne increase over 2006 production. In total, Asia posted a 66 tonne, or 12%, increase.

On other fronts, development and waste stripping helped to drive up global cash costs by 25%. Cash costs jumped US$45 per oz., compared with a US$160 per oz. rise in the gold price. Average total production costs in the fourth quarter were US$518 per oz.

What’s more, for the first time in more than a decade, central banks became net purchasers.

Net official sector sales soared 30% over the previous year to 481 tonnes. The increase offset much of the decline in scrap, which fell 15% from its 2006 level largely because people held off selling, hoping for higher prices.

On the demand side, jewelry demand was up 5% year-on-year, to 2,400 tonnes. Excluding scrap, fullyear fabrication rose by 10%.

Demand for jewelry was particularly strong in the first half of the year (up 22% over the first six months of 2006), but rising gold prices slowed demand in the second half, with fourth quarter demand dropping a year-on-year 20%. The survey predicts global demand for jewelry this year will be down by at least 200 tonnes.