Gold prices could reach or top $US1,600 an ounce by the end of the year, which would put them up by around 10% on current prices, according to the London-based metals consultancy, GFMS.
Earlier this year GFMS projected a $US1600 an ounce gold price by year-end and the firm is sticking to that forecast in its latest forecast.
In its bi-annual gold survey, issued this week, GFMS has downplayed fears the gold market is overbought and on the way to a correction.
It says these fears are premature. "In terms of gold fundamentals, there is a strong case for arguing that the glass is, at least, ‘half full’," GFMS said.
Gold prices hit a high of $US1,476.20 an ounce on Monday of this week, but have since retraced to around $US1,457 on these fears that the price has run ahead of demand, real and speculative.
Gold is up around 27% in the past year, so the gains have been impressive, although there has been a noticeable slowing in the rise so far in 2011.
But fears about inflation, rising oil and commodity prices, and the debt convulsions in the US continue to keep gold investors hoping for more gains to come.
(Remember that in real terms, adjusted by inflation, gold remains well below the peak set in 1980 of more than $US2,300 an ounce.)
Philip Klapwijk, GFMS chairman, said the prospects for gold remained bright and forecast an average price for 2011 of $US1,455 an ounce.
"Investors continue to be concerned about the outlook for inflation, with governments in general showing little appetite to tighten monetary policy significantly,” he said.
Mr Klapwijk said that the debt situation in the US and the budget stalemate could benefit gold later in the year and in 2012.
On top of demand from investors, GFMS said that consumption should hold up as official sector purchases continued and became more substantial, with solid gains in electronics countering a slight fall-off in jewellery demand.
The official sector, a group that includes central banks and sovereign wealth funds, bought 73 tonnes of gold on a net basis, a “remarkable change of direction for a market that has been used to absorbing substantial volumes of gold sold by central banks over the last two decades”, GFMS said.
GFMS estimated that central banks had not been net buyers of gold since 1988.
It said the official sector’s sales accounted for about 16% of global supply per year from 1989 to 2009.
GHMS sees another strong year of official sector buying in 2011, possibly rising to 100 tonnes and setting a new 22-year peak.
GFMS said that investment demand for gold fell in 2010 (that’s despite the fears about the euro, which were offset by better economic growth) but last year’s performance was still the second highest on record.
The 44th edition of GFMS’s annual survey showed that gold investment demand continued to drive gold prices higher, which rose by almost 26% over 2010.
As a result, world investment last year did set a new high in value terms, Mr Klapwijk said.
The survey said that exchange traded funds (ETFs) holdings experienced the second highest annual gain, while the purchases of bars and coins also surged last year.
"In contrast, investor interest in the futures market was scaled back in 2010, having peaked early in the fourth quarter," said the London-based consultancy firm.
However, the higher gold prices were not solely driven by the investment sector, said GFMS.
"Last year we saw signs of the gold market having adjusted to higher prices.
"While jewellery demand partially recovered, following 2009’s steep losses, scrap supply was little changed, even though gold prices posted a series of record highs in 2010," Mr Klapwijk said.
Higher demand in China and India were the main drivers to the recovery of the jewellery sector.
GFMS pointed out that key jewellery consuming countries remained net suppliers of gold to the international market.
America, the European Union and the Middle East all saw their scrap supply exceed jewellery consumption in 2010, said the GFMS survey. It said growing price acceptance by consumers should continue to help lift jewellery demand.
World mine supply posted a solid gain in 2010 said GFMS, with every major producing region contributing to last year’s higher total.
GFMS noted this is the first time this has occurred since 1988.
This outcome failed to dampen investor sentiment, as did a further decline in producer de-hedging said GFMS.
Mine output increased nearly 4% in 2010 last year to 2,689 tonnes, topping the peak of 2,646 tonnes set in 2001.
Klapwijk said that much of last year’s growth originated from Australia, China, Argentina and the US, despite declines at massive mines including Peru’s Yanacocha and Indonesia’s Grasberg, the world’s largest gold and No. 3 copper mine.
“A second year of strong production confirms that, after years of falling output, mine production is now responding positively to rising gold prices,” GFMS said.
"Producer de-hedging has been a constant feature on the demand side of the gold market since 2001, at times providing strong support to the gold price.
However, this role has now all but come to an end," said Klapwijk.
The consultancy warned that supply was set to grow by a large amount on the back of gains from both mine production and scrap this year, tempering the bullish influence of increased demand.
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