TORONTO (miningweekly.com) – The price of gold could top $1 300/oz later this year, but there is a risk in the short term of a minor correction, to around $1 050/oz, GFMS research director Neil Meader said in Toronto on Wednesday.

Presenting the findings of the consultancy's closely watched and respected annual Gold Report, Meader said that investment demand for the metal, which has been the main price driver in the last couple of years, should continue to grow this year and into 2011.

But beyond the next big rally, GFMS suggests that gold may move towards the end of its multi-year bull run, and that the market could face a “hefty” correction when the growth in investment demand eventually starts to taper off.

Unless inflation really takes off, or there is a “fully fledged” dollar crisis (both scenarios are seen as possible, but not likely, by GFMS), the group believes investment demand will begin to wane at some point, as real interest rates rise and the safe-haven attraction of gold becomes less relevant in a more stable economic environment.

But any serious correction is not expected for at least a year, and possibly longer than that.

GFMS has forecast a price range of $1 050 to $1 300/oz for gold this year, with bargain hunting and stock replenishment expected to kick in at the lower levels to move prices back up.

Higher, record prices are seen towards the end of 2010 or early in 2011, likely helped by concern over US fiscal imbalances and a weakening dollar. Low real interest rates, concerns over inflation prospects and sovereign debt worries will help underpin investment demand.

“And we have to consider a breach of the $1 300/oz level a possibility,” Meader said.

But it is no longer the "probability" it may have been, as the likelihood of an economic "disaster scenario" diminishes, he said in an interview.

While GFMS expects prices will weaken in the coming months, before returning to test new highs later this year or early 2011, Meader commented that the consultancy is having a hard time explaining the recent strong performance of the gold price.

“We have seen bits of investment improving, but we are not seeing any wholesale change in investment. We are starting to ask the question, why is the price so strong?” he said.

There may be buying taking place that the consultancy has not identified, perhaps by governments, or funds making aggressive purchases, he continued.

IMBALANCES

Meader repeated warnings issued earlier this year by GFMS chairperson Philip Klapwijk that the gold market has become highly vulnerable to shifts in investment demand.

Last year, investment demand surpassed fabrication demand for the metal for the first time since 1980, driven by investors in search of wealth protection.

At the same time, demand for jewellery and other fabrication uses slumped in response to rising prices for the metal.

“The huge percentage of total demand that investment accounts for continues to create a risk in the longer term,” Meader said.

“We do have to consider the imbalance in the market, any weakening in the investment case will need a substantial decline in the price to bring up the jewellery demand to clear the market.”

On the fabrication side, jewellery demand has had a “reasonable” start to 2010, but is only expected to experience a modest recovery this year, Meader said.

Any gains will be driven by developing countries, without much expectation of support from developed economies.

Meader pointed out, though, that buying associated with jewellery will be concentrated around times when the gold price dips.

“So it will continue to provide an underside to the market.”

Total demand for gold rose 8,3% in 2009, as a 333% leap in investment, to 1 429 t, more than offset a 16,3% decline in fabrication. Jewellery demand fell 19,8% to a 21-year low.

Although investment demand was strongest in the first quarter of the year, it was a rally in the fourth quarter that pushed the price past $1 000/oz, and towards a new record of $1 218, set on December 3.

In that case, it was not just about the investment activity, GFMS says.

While the physical market for gold had practically collapsed in the first quarter – scrap supply exceeded jewellery demand by 260 t – the fundamentals had improved significantly by the end of the year and it was the physical supply-demand support that, combined with investor buying, pushed prices up so strongly.

On the supply side, scrap flows surged in 2009, from both emerging and developed economies, and in some European countries, the levels of scrap entering the market actually exceeded jewellery demand.

Scrap supplies are expected to be flat overall this year, with a slight decline in the first half offsetting potential gains later on.

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