Gold prices are set to rise to past $US,1300 an ounce, before starting an easing that could end the uptrend of the last decade.
In fact according to the 44th annual gold survey from well known London consultants, GFMS, the current price of gold (around $US1,160 an ounce) is unsustainable in the long term and to keep demand rising, will have to fall to attract renewed demand from the jewellery industry.
For demand from jewellery to be revised, the gold price would have to drop well under $US1,000 an ounce, or by more than 25%.
The group released its 2010 survey in London midweek and predicted that the price could top the $US1,300 an ounce level, and then start weakening.
According to GFMS chairman, Philip Klapwijk, investor inflows would need to be maintained near their current record levels to take up the slack from lower jewellery demand.
He says that while continuing jitters over the strength of the global recovery may sustain investor demand in the near term, it is unlikely to be maintained in an environment of rising interest rates.
“This is a market that has moved out of kilter with its underlying fundamentals…we’re certainly in the end-game now, although that could still take a year or more to play out.
"But after that, it’s difficult to see how we can avoid a hefty drop in prices if we want to boost jewellery and trim scrap to bring the overall market back into equilibrium."
Gold hit an all-time high of $US1,226 an ounce last December.
GFMS said that investor demand has jumped sharply in late 2008 and into 2009 because of the global crunch and great uncertainty about the health of banks and the financial system.
This had overtaken demand from the jewellery industry for the first time since 1980, which was the time of the second oil shock, soaring oil prices and instability in Asia and Iran.
Gold prices hit record highs at the time, levels which were not reached again until 2009.
Investment in gold more than doubled in 2009 to $US58 billion, with exchange-traded funds drawing high levels of interest.
In tonnage terms Investment demand, including in bars and coins, almost doubled to 1,901 tonnes.
Mr Klapwijk said any return of concerns about the global recovery – especially the state of US government finances – would trigger renewed investor interest in gold and may push it to new highs.
But a “hefty drop in prices” would be needed to boost jewellery and bring the market into equilibrium.
And on the longer term, investment demand would not be able to offset subdued demand for jewellery.
Jewellery demand is sensitive to price, particularly in the key market of India, the world’s largest gold importer.
A record high average gold price of $US972 in 2009, combined with financial pressure on consumers, pushed jewellery production down by almost 20% to a 21-year low, according to GFMS.
Some improvement in demand for jewellery had been seen in the early months of this year, particularly from China and India.
Prices would need to fall below $US900 an ounce to revive the jewellery demand.
GFMS said that the amount of gold bought for investment quadrupled to 1,429 tonnes last year.
This was primarily invested through exchange-traded funds, which allow consumers to buy shares in physical gold without holding the metal themselves.
Demand for traditional forms of investment gold, such as coins and bars, was also strong, especially in the first quarter of the year because of the high fear levels about financial stability. Demand eased as conditions improved through the year.
Total global demand for gold increased by 8.3 per cent to 4,287 tonnes last year.
However, gold used to make jewellery fell 20% to 1,759 tonnes because of its high price and reduced consumer spending, especially in India, the US, Japan and Europe.
GFMS predicted that jewellery consumption would remain weak this year.
Production rose 7% to just over 2700 tonnes and GFMS doesn’t expect much in the way of significant new production for the next couple of years.
