Gold may rise to $US1,600 an ounce this year, according to London based research house, GFMS.
It said in a report that continuing low interest rates and the possibility of sovereign debt defaults (AKA Europe) will continue to spur demand for the precious metal.
But it has been a rough start to the eyar for the metal, a $US44 an ounce plunge on January 4, $US26 an ounce late last week and $US20 an-ounce (to around $US1349 an ounce in New York) overnight Thursday.
But it warns the bubble could burst for gold.
Gold may attract a “major expansion in investment before the gold bubble inevitably bursts,” GFMS said in the report.
“It has taken ten years of a bull market to get there but we have now a new record level of global mine production,” said Philip Klapwijk, executive chairman of GFMS, which produces benchmark supply and demand data on the gold market.
(GFMS does all the research and statistics for the World Gold Council).
GFMS predicted that the gold price could rise above $US1,600 by the end of the year.
That compares with a peak of $US1,632 this year predicted by 24 analysts polled by the London Bullion Market Association in their annual survey at the start of this month.
"Gold’s losses in the first week of January were not felt, however, to presage a true reversal in the longer term rally, although the consultancy did warn that the bulls might be disappointed in the opening months of the year," GFMS said.
Instead, GFMS says it that towards the northern summer prices could start to move materially higher, with gold possibly breaking through $1,500 at that stage.
They also see an approach to or even a breach of $US1,600 by late 2011/early 2012 as quite feasible.
The forecast rise in gold production this year (for the second year in a row) and expectations of higher prices) bodes well for the profits of gold miners and equity investors.
GFMS says that since 2001, the NYSE index of gold mining equities has risen 375%, lagging the 407% rise in the gold price, which was trading at around $1,370 a troy ounce, short of the record $US1,430.95 touched in December.
Although changes in mine supply are significant to gold prices, they typically have less impact than moves in gold’s huge above-ground inventories, estimated at about 170,000 tonnes.
And while mine output has rebounded, other traditional sources of gold supply have fallen, underpinning the consensus among investors and analysts that prices will hit new highs this year.
Gold investment, including in bars and coins, will jump 15% in the first six months of this year from the same period last year, the researcher estimates.
Gold climbed 30% last year, rising to the record $1,432.95 an ounce in New York, as governments became net buyers of the metal for the first time since 1988, led by Russia’s purchase of 135 metric tons, according to GFMS.
Jewellery demand rose 16% and bar hoarding was estimated to have more than doubled.
“For prices to stay firm, the market is clearly dependent on investment,” GFMS said. “Investors and some official sector institutions will be very concerned at the growing risks of currency debasement, be that via inflation or depreciation, and of sovereign debt default.”
At the same time, the supply of scrap, which usually rises with prices, fell slightly last year as investors held on to their gold in expectation of higher prices.
The mining industry failed to boost gold output from 2005 to 2008, despite rising demand for the metal. That helped underpin the rise in prices
But in the past two years, mine production has risen 10% and last year surpassed its 2001 level for the first time to hit a record 2,652 tonnes, according to GFMS.
That was a rise of 2.7%, but it was in excess of the rise in demand of just half a per cent.
Mr Klapwijk said the rise in global mine production – which amounted to 69 tonnes last year – was not yet significant enough to have a large impact on prices, although it may knock sentiment.
But he added: “If you continue to see growth, and cumulatively after 3-4 years you get production increases then you will start to see an impact on the supply-demand balance.”
Investors in the U.S. and Europe bought gold to hedge against currency devaluation as the Federal Reserve kept borrowing costs near zero percent and the European Union and the International Monetary Fund bailed out Greece and Ireland. Investors in recovering economies in China and India used gold to hedge against inflation, GFMS said.
Demand for gold rose 0.5% to 4,306 tonnes in 2010, GFMS estimates.
Investment demand fell 15 %percent to 1,616 tonnes, led by a drop in Western countries, the researcher said.
India accounted for 87% of jewellery purchases last year as demand rose to 2,037 tonnes.
GFMS said jewellery demand may drop 7% in the first half of 2011 as prices above $US1,400 an ounce deter buyers. But there’s continuing reports of very strong demand from Chinese buyers and shortages of gold bars of all sizes have been reported in Hong Kong.
GFMS said a further 6% increase in mine supply in the first half of this year may also limit price gains, GFMS said.
GFMS said Australian output climbed 16%, overtaking South Africa and the U.S. to become the world’s second-biggest producer after China.
Net official sector purchases were 87 tonnes against sales of 30 tonnes in 2009, GFMS said. The IMF disposed of 191.3 tonnes through September while Thailand purchased 16 tonnes and Ba
