So with the credit crunch and economic slump still with us, oil still sliding (and giving confusing pricing signals) what will gold do this year?
The inflation bears look at all the government debt and say, it’s good news for us, even though price deflation is more likely than an upturn in price inflation.
The strength of the slump is too strong and economies from Australia, to the US, Japan and Europe, are still feeling the pinch and will go on doing so for months to come.
But the combination of low interest rates, government bailouts and huge Government debt, makes gold bugs bullish and feel giddy.
Just how that will stimulate inflation in the midst of the worst economic downturn for 80 years, is a little mysterious.
The respected London-based researcher, GFMS said last week in its first look at the prospects for gold in 2009, that gold prices may climb to a record in the first half of this year because those historically low interest rates could weaken the dollar and government bailouts spark inflation.
Gold reached a record $US1,033.90 an ounce on March 17 and since then has fallen back to trade between US800 an ounce and $US900 an ounce.
According to media reports GFMS reckons gold could very well top the $US1,000 an ounce mark in the June half.
GFMS forecast in its September gold update that gold would rally to $US950 an ounce at the end of 2008. That was $US70 more than the actual year-end price.
The group still believes the gold bull market may now be extended, with a peak higher than previously expected sometime in the first half. It sees a weaker US dollar boosting the metal; (So far no sign of that though).
But the group also cautioned that the deflationary pressures, which should emerge more strongly in the second half of the year, could push gold prices down to around $US700 an ounce.
“It might be thought that recessionary conditions and an associated decline in inflationary pressures could undermine” demand, lowering prices to about $700 an ounce.
"This money-printing will at some point usher in a period of high inflation. Deflationary pressures could only be in evidence for a relatively short time.”
“The rally is unlikely to be derailed by supply due to relatively flat mine output, subdued central bank sales and, unless prices go to $950, little change for scrap supply,” GFMS said.
The group said that the massive fiscal commitments made by the US government could alarm foreign investors and cause official inflows into the Treasury debt market to weaken, undercutting support for the dollar.
(The US Treasuries market in particular seems to be a bomb waiting to explode with yields at record lows which do not seem sustainable)
Expecting stimulus and bank support spending in the US and UK to be announced this week and next will add more than $US1.2 trillion to that already bloated spending.
GFMS said in the report that it believed that strong investor demand for the metal had been “masked” by heavy selling by hedge funds which required cash to cover losses elsewhere, meet margin calls and pay for redemptions. And if it wasn’t for the selling, prices would have bounced back over the $US1,000 level.
While it expects mine production to remain stable at 1,170 tonnes in the first half, it predicts investment demand for bars may climb 49% to 201 tonnes, while consumption from jewelers and other fabricators probably could drop 4% to 1,254 tonnes.
Demand for gold has been hit by the downturn from the jewellery and industrial sectors, while demand for coins and investment in physical metal has been very strong for months. Many producers of specialist gold coins and other products have a long waiting list of clients wanting to buy.
On the supply side GFMS said gold output in South Africa in 2008 fell by the largest amount in 107 years, pushing the country into third place in the league of global producers behind China and the US.
The country’s gold output dropped by an estimated 14%, the sharpest decline since 1901.
South Africa gold production was a provisional 232 tonnes, down 38 tonnes on 2007, thanks to power supply limitations, an industry-wide skills shortage and an overhaul of mine safety procedures.
China extended its lead as the world’s largest gold producer, with output up 3% last year to 288 tonnes while output in the US eased 2% to 234 tonnes.
GFMS said the fall in South African output contributed to a substantial drop in global mine production which sank 3.6% to 2,385 tonnes, the lowest level since 1995.
Selling by central banks dropped sharply in 2008, down 42% from 2007 to 279 tonnes, the lowest annual total since 1996.
GFMS said it expected central banks to sell 127 tonnes of gold in the first half of 2009, down 23% on the same period of 2008.
