The price of gold could scale a new record later this year or early in 2010, fuelled by investment demand, but it is not all sunny skies ahead for the yellow metal, according to respected metals consultancy GFMS.

Gold has already experienced a good deal of volatility in 2009 – it started the year at around $880/oz, jumped briefly into four-digit territory in February and has fallen back over the last couple of weeks to about $882/oz last week, as some investors returned to equities.

GFMS, which published its Gold Survey 2009 last week, expects that gold could rise above $1 000/oz, research director Neil Meader said in Toronto.

“And I don’t think we can discount $1 100/oz either,” he added.

But Meader said he was not surprised that bullion prices had retreated from the levels attained earlier this year, and that GFMS expects gold could fall to the mid-$800/oz level, or possibly even to the low $800s in the short to medium term.

At that point, bargain hunting and stock replenishment would likely kick in, sending prices upwards once again.

How low prices end up falling, and how long they stay that way, will depend on whether there is any more significant bad news on the economic or financial sector front, while, if inflation rises faster and more steeply than expected, or if the US dollar weakens, this would support an extended rally for gold prices.

At the moment, GFMS expects that the rally that sends gold prices back up over the $1 000/oz mark, and potentially past the all-time peak of $1 030,80/oz that was reached in March 2008, will gather momentum in the latter part of 2009, or possibly early in 2010, Meader said.

“And, to get to that $1 100/oz target. I think we need a notable decline in the dollar, and some signs that we are going to be entering a period of grossly high inflation,” Meader commented.

Massive Imbalances

In a presentation to Toronto analysts and investors, Meader cautioned that “massive imbalances” developing in the gold market, as a whole, would likely result in high levels of volatility until things sort themselves out.

Because of high prices, fabrication demand for jewellery and other applications continues to decline, which means that the price is becoming increasingly propped up by invest-ment demand.

“And if you only have one area of demand that’s strong, that can be a recipe for quite volatile prices.”

That said, GFMS does expect that investor interest will remain strong for the duration of this year, as well as possibly into 2010.

Investors continue to prioritise security and wealth preservation, and the measures being taken by governments to combat the financial crisis create a risk of high and sustained inflation in the medium to long term, as well as – in the case of the US – a weaker dollar.

“We feel quite strongly that the financial and economic crisis that we are seeing does create a very strong investment case for gold,” he said.

As far as gold supply goes, production will increase slightly, as Asia, Australia and West Africa produce more gold, and gold sales by central banks are likely to remain low, Meader said.

The big shift that is taking place on the supply side is a marked increase in scrap, which has already leapt in the year to date.

This is expected to increase over the rest of 2009, and it is “not impossible” that scrap supply will exceed demand for jewellery fabrication.

High and volatile prices, with the background of the economic crisis, will likely result in a decline in jewellery demand this year, and other fabrication will also continue to be affected in the same way.

There is, however, increased demand for physical gold in the form of coins, which are also seen as a ‘safe haven’ investment.

Mine Production Lowest Since 1996

Meanwhile, GFMS CEO Paul Walker reports that production fell 2,5% in 2008, with the biggest drop coming from Asia. African output fell by 30 t, led mainly by a steep decline in South African production. However, despite a 12-t decline in its production, China maintained its position as the world’s leading gold producer, with the US moving into second place. “Global gold production will increase this year by between 20 t and 30 t; however, this will depend largely on China’s ability to recover from its loss last year,” says Walker.

Annual average global total cash costs in US dollar terms increased by almost 20% year-on-year, with Australian operations reporting the sharpest increase in total cash costs for the second consecutive year.

Global scrap supply surged by 27%, to over 1 200 t in 2008, fuelled by rising gold prices and the economic downturn.

Although growth in recycling was concentrated in the Middle East and East Asia, similar trends were also apparent in western markets, GFMS said.

Total fabrication demand for gold fell by 7% to 2 850 t last year, its lowest level since 1988.

To watch a video in which PAUL WALKER GFMS expects the average price of gold for 2009 to be $970/oz, click here.

To subscribe to Mining Weekly's print magazine email subscriptions@creamermedia.co.za or buy now.