An inflation-driven surge in gold invest-
 ment around the world will likely boost 
 the yellow metal to new highs in the second half of this year, GFMS chairperson Philip Klapwijk writes in the latest issue of the consultancy’s quarterly newsletter.

Investment demand, and especially so-called ‘western’ elements, like exchange-traded funds, futures and the over-the-counter market, are expected to remain the driving force behind gold price movements over the rest of 2009.

“Given increasing fears over the long-term inflation threat in western countries, we 
expect world investment to see a massive 
increase this year, particularly from its 
implied net investment and official coins components,” Klapwijk commented.

GFMS calculates world investment as the sum of implied net investment or disinvesment, official coins, bar hoarding, and 
medals and imitation coins.

In its May quarterly three-year gold forecast, GFMS predicted that world investment this year would actually exceed 1 500 t, or some $47-billion, which would carry the gold price to new peaks by the end of the year.

Growth in investment demand has been the primary driver of the rally that has taken gold from around $250/oz in early 2001 to peaks above or close to the $1 000/oz level in 2008 and 2009

Increased demand has been mainly driven by booming investor interest in gold.

“[This is] a result of the general decline in the US dollar since 2002; rising commodity 
prices (at least until mid-2008); concerns over the security of bank deposits following the near meltdown of global financial markets; more recently, the drop in short-term interest rates to levels close to zero in the major advanced economies; and growing concerns [over] 
the potential longer-term inflationary consequences of unprecedented monetary and fiscal policy easing,” Klapwijk says.

He suggests that the ‘western’ investment tends to be what drives gold prices, either higher or lower, while demand in the rest of the world – bar hoarding, medals and coins –generally tends to support a floor – “although as has been seen over 2001 to 2009 – to date, 
a floor that is at successively higher price levels”.

In April, GFMS said it expected to see gold 
prices set new records this year, possibly rising as high as $1 100/oz, on investment demand. Gold set a three-month high of $989,80/oz early last month, but has been weighed down in the last couple of weeks by a stronger US dollar.

The precious metal was trading at around $936/oz last Thursday afternoon.

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