Precious-metals consultancy GFMS says that the price of gold could still rise above the $1 300/oz mark in the second half of the year, driven by strong growth in investment demand.

The higher price will be aided by phy- sical markets adjusting to higher price levels, as indicated by the rebound in fabrication demand and the drop in global scrap supply in the first half of the year, in spite of considerably higher average dollar gold prices, says GFMS chairperson Philip Klapwijk.

However, the consultancy cautions that there is still scope for downside over the next few months if investment demand temporarily faltered, although, in the absence of a major change in the eco- nomic outlook, it was felt that gold would be “well supported” at prices between $1 150/oz and $1 200/oz.

The precious metal hit an all-time high of $1 265,30/oz in mid-June, but was trading below $1 200/oz by end of June.

Klapwijk comments that, even though progress to $1 300/oz is dependent on even higher inflows from investors, economic conditions still seem to favour such growth in investment over the balance of the year and will probably continue to do well into 2011.

However, Sydney-based Resource Capital Research is “moderately bearish” on the gold outlook and says that the recent records were driven by the words ‘crisis’ and ‘banks’, associated with the European debt crisis.

“Take away the crisis mentality, and gold looked precarious,” says GFMS senior analyst Tony Parry.

He predicts that the gold price is likely to trade below $1 200/oz for the remainder of the year.

Klapwijk also notes that it should be borne in mind that, especially with infla- tion low in all the major economies and given the tough fiscal measures now being introduced in many countries, any serious tightening of monetary policy in the US and Europe will quickly trans- form the outlook for investment and the gold price, even if that possibility currently appears rather “remote”.

He adds that some of the major supply and demand trends are unfolding this year.

GFMS expected an increase in the supply of gold in 2010, owing to the International Monetary Fund programme boosting overall official gold sales and further growth in mine production, which, together, would offset a marginal drop in global scrap supply.

“On the demand side, fabrication demand, which is dominated by jewellery, is forecast to recover some of the ground lost in 2009, although year-on- year growth is expected to slow in the second half of 2010 owing to higher gold prices.”

Klapwijk says that the market would, therefore, remain in substantial surplus in 2010.

“With limited scope for dehedging by producers, the gap between supply and demand will have to be filled by investors, who, so far this year, have considerably increased their holdings of gold in the form of exchange-traded funds and physical bullion,” he says.

The consultancy expects investment demand in the second half of 2010 to be volatile, but, overall, to remain on a posi- tive trend, owing to ongoing concerns about the long-run value of major currencies, particularly in the light of the con- tinuing ultralow short-term interest rates and the increase in government debt levels.