Noted London gold forecaster and consultant, GFMS has warned the gold price faces pressure from two distinctly different sources that could send it in vastly different directions.
One is the usual siren call for gold supporters of pressures from rising inflation as the markets recover and the huge spending and debt burdens force up prices.
The other is the reverse, a surge of disinflationary pressures as conditions worsen in markets once again and there’s flight to quality and safety in US dollar assets, as there was a year ago.
In its first update of its Gold Survey 2009 GFMS chairman, Philip Klapwijk, said for these reasons it is far from certain that the current bull run in gold will continue.
GFMS believe the basis for this still possible but a "less likely reversal in trend would be the various monetary and fiscal stimulus programmes failing to rejuvenate the world economy, feeding through to a disinflationary conditions.
"It was expected that its impact on gold would in turn probably be magnified by investors seeking out the security of US Treasuries, which would act to boost the value of the US dollar.
Klapwijk said in a statement that "on balance, we’re still favourably disposed towards the price in the medium term.
"That’s mainly because we see it as highly likely that debt monetisation and ultra-low interest rates, especially in the US, will at some point feed through to a build in inflationary pressures.
"Throw in dollar weakness and disappointment over conventional assets as the green shoots argument withers and then gold well over $1,000 becomes perfectly feasible".
The Update did warn, however, that the path to this may not be smooth as a brief dip could occur in advance of longer term strength, with Klapwijk also adding that the recent spike could readily unwind as its foundations looked shaky.
While inflation/deflation may be important for the future, the report believes that, in the first half of this year and in particular during the very early weeks, it was counterparty risk that investors feared most.
Klapwijk noted, "it wasn’t that surprising that, in the wake of the collapse of Lehman Brothers and other financial institutions, people should choose to park some of their capital in gold very specifically because it essentially has no counterparty risk.
Add in the dollar’s slide from December and equity markets coming under pressure as the world economy went into recession and that largely explains the leap in investment – and basis our World Investment series to record levels over 750 tonnes in the first quarter alone".
GFMS said it was aware that some market observers may have felt that investment ‘under-performed’ in the first half, given that it failed to rally the gold price over $1,000.
However, the consultancy believe this judgement somewhat unfair and that more emphasis should be placed on the amount of bullion the jewellery sector was buying; the Update notes that, in the first quarter, jewellery fabrication collapsed and was overtaken in scale by scrap, which boomed to almost the same size as mine production.
The report lists two main reasons for this event, the onset of a global recession and currency weakness in various consuming countries translating into record local gold prices.
Klapwijk added, "as soon as we saw, early this year, that countries like India, Turkey and Italy had become net bullion exporters, it was obvious to us that the rally should soon grind to a halt and probably go into reverse".
GFMS reports that a key reason as to why gold prices did not collapse after the rally topped out was the restrained nature of supply, with, for example, scrap retreating as near market supplies dried up and first half official sector sales slumping.
The latter was believed to be of particular significance since, as Klapwijk noted, "not only did we lose the actual impact of the heavy selling that we’d seen in previous years but the low level of sales must have assisted investor sentiment and that was at a time when many could have cut and run if they thought the longer term outlook for gold was turning shaky".
GFMS said that the supply/demand balance, mine production has been mildly negative for the price, with its own figures showing a first half year-on-year increase of a respectable 7%.
Its price impact was, however, mitigated by much of the rise coming from the ‘one-off’ of new project starts ups and many in the market were instead tending to focus on the difficulties in maintaining output in the more mature producing areas.
The market also had to face the slump in producer de-hedging (Barrick last week announced that it was dehedging), although its price impact was constrained by it largely reflecting just the greatly reduced scale of the outstanding producer hedge book and not a shift by some miners in favour of fresh hedging.
As Barrick unwinds its book (following Newcrest and Lihir) that will leave AngloGold Ashanti, the world’s third biggest producer, with the largest hedge book of forward sales.
New York gold fell $US7 an ounce overnight to $US999.
