Gold not yet approaching a turning point - GFMS

Source:  Rhonda O'Connell 13 April 2011 - mineweb.com

LONDON -

GFMS, in its newly-released "Gold Survey 2011" expects the next waves of investor buying to take gold to $1,600 before the end of this year. The study points out that on the downside there are arguments that institutional buying is less buoyant than hitherto and that investor thirst for the metal may be quenched by the prospect of rising interest rates in the United States, Europe and China along with some other emerging markets, and also that the "surplus" generated by the different components of underlying fundamental demand may be too much for investors and central banks to absorb.

Countering these arguments, however, are a series of positives, including the following:

• This year holds little likelihood of a radical departure from loose monetary policies in the developed world, or for an aggressive series of interest rate increases from China, because of the continued fragility of the economy and the financial system, along with vulnerable financial markets that may urge extra caution on the part of policy makers
• The probability of debt contagion into the United States and Japan, especially given those nations' 2011 budget deficits and the lack of strong measures in place to constrain them
• The consequent threat of higher inflation rates
• Plus a palpable shift towards holding physical metal; in addition private investors in Asia are taking increasing market share; this points to firmer hands and a reduced likelihood of short-term sell-offs such as those that the futures markets experienced in late 2010 and early 2011.

GFMS has augmented its usual in-depth supply-demand analysis with the addition of an assessment of world physical bar investment, as against the bar hoarding figure of the past. This reflects an improvement in data capture with respect to bar investment in North America and Europe, which, GFMS notes, has "exploded" in the last three years. Physical bar investment across the world jumped by almost two-thirds last year and at just under 900 tonnes was not far short of half the jewellery consumption in 2010. In 2009, bar investment was roughly 40% that of gold demand in jewellery consumption. ETF investment, by contrast, dropped by 45% last year.

Looking at this a different way, ETF's plus physical bar investment in 2010 exceeded the bars+ETFs in 2009 by just 6%; the major difference was that in 2009 ETFs accounted for 54% of the two combined, while in 2010 they took up just 28%, emphasising GFMS' point about the partial shift towards smaller, potentially stickier, hands.

Although bar demand in North America and Europe took off in 2008 and 2009, it was demand in India and China that really powered ahead in 2010.

With the exception of 1980 and, briefly in the first quarter of 2009, the Indian market has been a near-permanent net investor in gold since the Surveys started compiling data back in 1969. In 2001, bar investment in India grew to 260 tonnes, an increase of 150 tonnes against 2009 (and of 106 tonnes from 2008) and equivalent therefore to 30% of world bar investment last year. Over 60% of this was concentrated in the second half-year as ever-rising prices generated increasingly bullish local views that attracted new investors such as young professionals and "even traditional jewellery consumers" to invest in gold bars. This investment remained strong in January, but started to fade in February in anticipation of a short-term price correction.

China's bar demand, meanwhile, kept up its steady growth to reach 179 tonnes, with offtake driven by a range of factors, including a rapid increase in disposable incomes and consumers' preparedness to diversify away from cash, property and equities, along with the government's moves to stifle property speculation. Rising inflation concerns of course have also played their part, as has the network of commercial banks across the country.

Other countries singled out for note include Vietnam, where bar hoarding was 67 tonnes, a 15% increase to take up 8% of the world total. This was not only driven by rising inflation, but also by the closure of spot trading and futures floors that brought investors back to the physical market. Thai investors returned in size (largely in the first half of the year) after net dishoarding in 2009, while Japan was a net dishoarder, although most of this was concentrated in the final quarter in response to higher prices. The market was mixed here, however, and there was a steady undercurrent of buying throughout the year, encouraged in part by a number of publications extolling gold's virtues as an investment as well as substantially media coverage of the rising price that helped to reaffirm "gold's long-standing role in Japanese investment culture".

Bar demand in the Middle East reached an all-time high in 2010. Iran, a net dishoarder in 2009, reversed the position in 2010, while expectation of rising gold prices and potential inflation (along with some speculation among High Net Worth individuals in places) boosted demand elsewhere in the region.

Bar demand in Europe fell by 6% in 2010 although this followed a high peak in 2009 and it was the second highest on record, driven by concerns over the European financial and economic environment, with Germany and Switzerland in the vanguard. In North America, meanwhile, bar demand fell by 18%, largely as a result of improved confidence in the first months of the year. Interest picked up, though, as it had in Europe, in April-June as the European crisis intensified and then again in the final four months of the year,

This continued interest in gold as a hedge against risk suggests sustained investment activity in 2011. This and other underlying fundamental shifts point to a market that is adjusting to higher prices, a suggestion borne out by the fact that jewellery demand has held up in the first quarter of the year, while scrap flows have been reduced year-on-year. GFMS therefore suggests that the fundamentally-driven price "floor" for gold is still rising.