JOHANNESBURG (miningweekly.com) – Gold is sidelining platinum and palladium and could hit $1 800/oz by Christmas, says UBS bullion bank precious metals strategist Dr Edel Tully, who describes the present as “an extremely exciting time” to be in precious metals.

Tully expects gold to be in deficit in 2011 as a result of only moderate mine-supply growth, a lower level of recycling than in 2009 and the steady buying of gold by central banks.

“Gold will be the one precious metal in deficit this year, with platinum in a small surplus,” she forecasts to Mining Weekly Online.

The visiting UBS precious metals strategist expects this year’s central bank gold buying – currently at 150 t for the year to date – to challenge the 1988 level of 282 t.

While gold’s price appreciation in the year to date has been 14%, taking it beyond $1 600/oz, platinum, despite support from the rising gold price, has only been “hanging in there” by comparison with a 2% appreciation into the $1 700/oz bracket.

Despite gold helping platinum to appear relatively cheap, Tully describes investor sentiment towards platinum as “not that high currently”.

Her $1 800/oz-by-Christmas gold-price forecast is, however, predicated on European and US macroeconomic woes remaining “unsolved”.

She describes European debt efforts to date as being mere “band-aid” and sees a US credit downgrading as being “a strong likelihood”, which would be positive for gold.

Conversely, a “surprise” positive agreement between US Democrats and Republicans would see retracing of some of gold’s recent gains, but this retracing would only be of short duration, owing to the number of gold investors still willing to buy gold, but not during periods of record highs.

Should European and US debt problems fade, there would be no reason for gold to remain at record highs, but any downside would cause strong physical demand, irrespective of whether or not it takes place inside or outside the high-demand Indian wedding season.

The fear factor is prompting Europeans to buy significantly more small gold bars and coins and an investor angle is also present in Indian gold jewellery buying.

GOLD DEFICIT IN 2011

While there is 165 000 t of gold in the world, its availability is restricted. For example, much of the gold that has been in India for generations is unlikely to be sold.

With central banks no longer being net sellers, current supply is largely restricted to the 2 600 t/y from mining and 1 600 t/y from recycling.

The most recent data shows that until June central banks bought 150 t and their brisk gold-buying pace is poised to continue, which represents a noteworthy change in the fundamentals.

Although the third European central bank gold agreement allows official gold sales of up to 400 t a year, few are opting to sell, with the International Monetary Fund, the last to avail itself of the opportunity, completing its sales in December.

There is currently a general reluctance to sell what is regarded as the world’s foremost safe-haven asset.

While gold recycling is also brisker, 2009’s record first-quarter levels are unlikely to be exceeded, as there is not the same need to raise dollars.

On the demand side, physical sales to India for fabrication and jewellery are 25% higher year to date than in 2010, the rising gold price notwithstanding and India being less seasonal than in the past.

China has become more seasonal than India with turnover on the Shanghai gold exchange easing off in the summer months and picking up again in September.

There was a scramble for physical gold during 2011’s Chinese New Year, which led to bullion banks like UBS sending high-premium consignments to China, which is likely to result in China securing supplies earlier.

China is permitting the Chinese people to own more gold and keeping its power dry on the announcement of official State gold ownership levels.

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