Gold: Not So Golden Outlook, But Not Tarnished.
April 13th 2012 – Australasian Investment Review – (AIR)
Gold prices could fall below $US1,550 an ounce over the next two months but recover last year’s record highs before 2012 ends, according to the world’s most authoritative annual survey of the metal.
And look to China to once again give the world gold market valuable support this year, as it is doing to so many commodity markets around the world.
Thomson Reuters GFMS said in its first gold outlook report for 2012 that there was a solid chance the price could reach $US2,000 in 2013, a forecast that was made for this year by the group in late 2011.
Gold was trading around $US1,660 an ounce overnight as markets recovered from their funk at the start of the week.
But there’s also a chance that the new peak in 2013 could be it for the gold price after a 12 year surge as confidence in the world economy improves (even accounting for worries about Europe) and the re-emergence of ‘normal’ monetary policies in major economies such as the US.
And there are also factors such as the improved outlook for the eurozone (especially its banks) from the three bank loans by the European Central bank and the current US rebound, which has reduced the chances of a third round of easing.
“The low $1,600s came as little surprise and it’s quite possible we’ll see a push even lower, perhaps below $1,550 in the next month or two,” Philip Klapwijk, the global head of metals analytics with Thomson Reuters GFMS said in London midweek at the launch of the new survey.
But he saw some reasons to be still bullish for the metal’s prospects.
“We could easily see last September’s record high being taken out, and a push on towards $US2,000 is definitely on the cards before the year is out, although a clear breach of that mark is arguably a more likely event for the first half of next year,” Klapwijk said.
As well the reasons for 2011’s surge were still around.
Oil prices and Iran-Israel and further problems elsewhere in the Middle East, for example.
As we have seen briefly this week over Spain, fears about European sovereign debt could return.
The current US recovery could run out of steam (which the firm believes is a possibility), forcing the Federal Reserve to undertake additional monetary-policy measures.
China, India and Brazil are also expected to loosen monetary policy over the rest of this year.
All this could see the old friend of gold, ‘inflation’, back on the scene.
“A corollary of all of this monetary largess is fears about resurgent inflation, and that becomes all the more likely if oil prices motor higher should tensions get any worse between Iran and the US,” Mr Klapwijk said.
Looking at 2011, the group said there was an overall increase in gold demand during 2011 to 4,486 metric tonnes, up 0.6% from 4,459 in 2010.
But while net world investment fell, physical investment in the form of bars was strong and central bank buying continued.
Jewellery demand fell modestly in 2011, despite higher gold prices, while mine supply rose.
In fact jewellery fabrication fell by 2% to 1,973 tonnes last year, which actually wasn’t bad given the way prices surged.
“Gold was clearly dependent on emerging markets’ economic strength as China’s jewellery demand grew to a record level, while India’s fell by less than 3%,” Mr Klapwijk said.
The consultancy’s’ broadest measure of net world investment fell by 10% to 1,605 tonnes, but the rise in prices meant the value investment was up 15% to a record level of just over $US80 billion.
Klapwijk said that there was a “substantial” rise in demand for physical gold, as opposed to paper gold products. Demand for bars jumped 37% year-on-year to 1,209 tonnes and accounted for some 75% of all investment.
“We had very strong demand globally for gold bars,” he said.
“The question, of course, is whether we can expect to repeat this year such a strong number. Buyers of gold were looking for…gold in its purest form.
“There was much less interest, on a net basis, in paper-gold products and taking on something that was essentially somebody else’s obligation, even if was a gold-denominated obligation.
“The only area where we didn’t see strong bar demand was the US.”
A big driver of higher demand was from the so-called official sector (mostly central banks and sovereign wealth funds).
Net official-sector purchases rose by just over 450 tonnes, and will fall to around 440 to 450 tonnes this year.
The net growth was the result of trivial sales by signatories to the European Central Bank Gold Agreement, coupled with heavy purchases elsewhere by central banks (China and Sri Lanka, for example) keen to diversify their dollar reserves, a development likely to lead to more sizeable acquisitions this year, Thomson Reuters GFMS said.
“Central-bank purchases hit levels that we haven’t seen in a generation,” Mr Klapwijk said.
Looking into 2013, the report said a record high gold price above $US2,000 an ounce next year could mark the peak of the precious metal’s more-than-decade-long bull run as monetary policy in key economies starts to normalize.
Gold prices are likely to be driven above $US2,000 as concerns over the eurozone debt crisis persist and the prospect of more US monetary easing gains ground.
But that move could be short lived as those factors dissipate, particularly if the prospect of higher US interest rates becomes a reality in 2014, as markets now seem to believe (that is, earlier than the Fed’s forecast of “late 2014″).
“We are expecting still that we are going to see a push above $2,000 in 2013, but it may be that 2013 marks the high water mark for the market,” Mr Klapwijk said.
“It depends (on whether) we see some resolution in Europe, enough to really take some of the sting out of that issue… an end to stimulus measures in the United States… and the prospect of a normalization of monetary policy.”
Klapwijk said gold was expected to trade in a range of $US1,530-1,920 an ounce in 2012, with an average price of $US1,731 an ounce.
The upper end of that price view is just below last year’s record of $US1,920.30 an ounce, reached in September.
“What we’re seeing… is a postponement of the next leg higher in prices,” Mr Klapwijk said.
“The $US2,000 an ounce level being surpassed is probably looking more like a story for the first half of 2013 than something we will see in the second half of this year.”
“Lying behind this is what we have seen over the first three months of this year, which is a certain amount of investor fatigue, (and) certain physical markets such as India and China not punching quite as hard as they did last year,” he added.
Looking at projections for supply and demand this year, he pointed to a fundamental surplus in the market which in dollar terms could be more than $US130 billion.
Some areas of demand, such as central bank buying, will remain important, but the company said it does not expect official sector purchases, which last year rose to their highest since the mid -1960s, to increase much this year in ounce terms.
A softer picture has emerged of jewellery buying, the largest single element of gold demand.
The tax changes (rises) in India have seen a 12-day strike by the jewellery sector there (which ended earlier this week) and talks with the government.
But demand will moderate in India until the tax situation is sorted out and clarified. Meanwhile some analysts warn that smuggling of gold into India from low tax sources (such as Thailand and the Middle East) will resume.
India was already weakening and demand fell nearly 3% in 2011 to 761 tonnes.
The gap between the amount of gold mined and recycled, and the quantity used to fabricate jewellery and other goods, is expected to widen this year, Mr Klapwijk said.
“That number has gone up substantially over recent years, in terms of the call on the market and the amount that needs to be committed to the market to clear this surplus,” he said.
Gold’s correlation with other assets such as stocks, the dollar and the euro is still in a state of flux.
In the first three quarters of 2011 gold traded largely in line with the dollar as investors bought both assets as a haven from risk.
That ended from September last year onwards and in the last six months it has traded against the dollar and in line with other commodities (as it does in times of less stress).
While it is currently less vulnerable to fluctuations in the equity markets, Mr Klapwijk warned that prices could still drop sharply if a sudden move lower in stocks is seen.
But watch China (as in all other commodities). It will be the major influence from the demand side for physical metal.
While world investment in gold last year slipped 10.4% on-year to 1,605 tonnes, driven by heavy liquidation in the over-the-counter and gold futures markets in the post-September sell-off (which also damaged silver).
But as speculators and other punters bailed out, demand for physical gold rose ignoring the record prices, thanks in part to the solid demand from China.
That is a trend GFMS sees happening in 2012 and 2013.
Retail sales before and after the 2012 Chinese New Year were strong thanks to fears about inflation and current political instability at the top of the country’s leadership, according to anecdotal reports.
“Continued economic growth and a desire to own gold as an alternative asset are likely to propel Chinese jewellery fabrication to another record this year,” GFMS said in the report.
In 2011, Chinese jewellery fabrication soared 14.6% to hit a new record high of 496 tonnes, building on a near-20% gain to 423 tonnes in 2010, according to the report.
The Chinese jump countered the fall in global jewellery fabrication demand, which fell 2.2% in 2011 to 1,973 tonnes.
Gold bar demand from China alone rose 40% in 2011 to 250 tonnes from 179 tonnes the year before.
And there was also strong demand for coins from China (as well as Turkey).
While the firm saw demand from India, traditionally the world’s largest gold buyer, slowing because of the country’s weaker economy and the tax imposts on gold in the budget, demand from China will continue, though at a slower pace.
For example, growth in Chinese bar demand is forecast to ease to 20% annually from the 40% rate last year and to “single-digit” growth in jewellery consumption compared with 13% in 2011.
As always what’s slow for China is solid growth for other economies.
PS: interesting GFMS also said some mining companies might start reconsidering hedging their gold production in the next year because of the moderate to weak outlook for the price.
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