TORONTO (miningweekly.com) – The price of gold will likely rise above 2009's record of $1 226/oz this year, and could even climb as high as $1 300/oz if the global economic recovery proves sufficiently sluggish and new investment money continues to enter the market, Philip Klapwijk, chairperson of consultancy GFMS, said in Toronto on Wednesday.

However, he cautioned that the big role being played by investment demand leaves the gold market vulnerable to a major correction if and when investors start looking elsewhere.

Investors have been buying gold as a safe haven investment, as a hedge against inflation and in the expectation that the metal's price will continue to rise.

Jewellery demand, on the other hand, has slumped dramatically as prices rose to record levels last year and, for the first time in 30 years, investors created more demand for gold in 2009 than jewellery buyers, Klapwijk said.

While investment inflows into gold remain significant, and look likely to continue that way, the market reliance on investment is “somewhat worrying” in the longer term.

Because of the market's dependence on investment, the biggest threat to the gold price will obviously be the eventual shift to “business as usual” in the world's economies, Klapwijk said.

“The honeymoon won't last forever. At some point, the scenario does change, and then the investment case for gold becomes less appealing.”

Once gold's appeal begins to dim, all it will take is a halt or a deceleration in the flow of money into gold to have a big impact on prices, Klapwijk cautioned.

“The market, if you like, has become a bit like a junkie - it has become more and more dependent on bigger and bigger fixes of inflow from the investor community.”

ROUGH RIDE TO $1 200

For now, however, the outlook for the yellow metal remains rosy, with investment demand forecast to grow robustly through 2010.

GFMS believes the likelihood of a slow road to economic recovery is high, with the potential for a “double dip” this year in the US, Europe and Japan.

“We continue to be in an environment of zero or negative real interest rates, there are still very significant question marks being placed against the US dollar in spite of the rally we've had in the last few weeks, [and] inflation expectations continue to rise.

“And this is creating a backdrop which remains pretty positive for gold investment,” Klapwijk said.

He said it is likely that there will be an increased flow of new money into the gold market from institutions like insurance companies and pension funds, and with sovereign wealth funds becoming more active.

“And I think in the second half of the year we could see prices increase above the $1 300 level quite easily, if that flow comes into the market.”

GFMS has forecast an average price of $1 175/oz in the first half of the year, and expects gold will trade between $990/oz and $1 230/oz during the six-month period.

It will be a “rough” ride, however, as prices will likely remain volatile, Klapwijk commented.

“And we do think there is a possibility for a significant correction in the next six months.”

THE NUMBERS

According to GFMS data, gold mine production rose 6% in 2009, to 2 553 t, after three consecutive years of decline.

However, although output from mines may rise again marginally this year, production will likely resume its decline in 2011 and onwards, Klapwijk said.

Australia was the second-biggest producer last year, behind number-one China, with South Africa relegated to the bronze medal position.

It is no surprise that, with gold prices at record levels, scrap supply increased by around 27% in 2009, to a new all-time high.

On the demand side, jewellery fabrication demand fell by 23%, to a 21-year low of 1 687 t, while other fabrication decreased 8%, to 639 t.

World investment demand doubled year-one-year, to 1 820 t.

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