London, 17 January 2012

Update 2: Investment still forecast to push gold price to fresh all time high in mid-term ... but reversal of multi-year rally now more discernible for next year. Thomson Reuters GFMS launched its Gold Survey 2011 - Update 2 today, their latest report on the gold market at events in London, New York and Hong Kong. The following details some of the highlights from the briefing given at the Hong Kong launch by Philip Klapwijk, Global Head of Metals Analytics at Thomson Reuters GFMS.

One of the report’s key conclusions is that, having risen by 28% in 2011, prices may struggle in the short term and this explains the seemingly cautious forecast of a first half price average of $1,640. Klapwijk noted, “we are conscious that the Eurozone crisis is far from over and its impact on liquidity, the value of the US dollar and attitudes to risk could all become very apparent, particularly once buying linked to the Chinese new year is behind us.”

However, the consultancy believes that prices should shrug off any lethargy and power ahead to fresh all time highs, with Klapwijk adding, “we could even see prices just over the $2,000 mark later this year or in early 2013”. Factors the report highlights to explain this are exceptionally low interest rates, enhanced inflation expectations basis monetary policy easing and a general mistrust of fiat currencies. Klapwijk commented, “we’ve seen a great deal of attention on the Eurozone debt crisis, which has led some to seek out the dollar and US Treasuries as a least bad option. However, the re-emergence of US concerns, in particular any apparent need to adopt QE3, could really fire up the gold market. After all, don’t forget that gold’s price spike last August/September followed on from the US debt ceiling impasse and downgrade.”

Nonetheless, the report does acknowledge that the gold market is nearing the closing stages of its decade long bull run and that, once the macroeconomic backdrop changes and investment in gold fades (probably some time next year), a secular retreat in the price will unfurl.

The report’s analysis of the past year also contains some important findings on why the price behaved as it did. One key element is the resilience of jewellery demand, which only fell by 2% in 2011. This was largely ascribed to strong performances by India and China, thanks in the main to bullish price expectations and robust GDP growth. Most other countries, in contrast, recorded losses, often substantial. At the same time, global scrap fell by 2%, despite the price rise. This was in turn attributed chiefly to price acclimatisation, near market stock depletion and expectations of higher prices. This meant that jewellery fabrication net of scrap actually rose by 2%.

Also supportive in 2011 were net purchases by the official sector, which are estimated to have jumped to 430 tonnes. This was largely due to ongoing trivial sales by signatories to the Central Bank Gold Agreement and a marked rise in purchases by countries outside this group, chiefly due to a desire to diversify reserves away from fiat currencies. This was also significant as it encouraged private sector investment.

The above helps explain the gold market’s ability to absorb the near 4% rise in mine production to record levels as new projects continued to come on stream or ramp up and some mature operations were better placed to sustain output thanks to a high price environment. There was also the return to net producer hedging to consider, although its volumes was slight.

World Investment (the sum of all categories of investment) saw a notable rise in approximate value terms of over 20% to a record $80 billion. Much of the growth was in physical form; net bar purchases rose by over a third to almost 1,200 tonnes, with gains particularly strong in East Asia and western markets. Not all sectors were buoyant, however. ETF holdings for instance continued to grow but their 7% rise was slower than 2010’s 20% jump, while the net investor long on Comex fell by more than 90,000 contracts over the year - changes which help explain why World Investment in tonnage terms fell by 7%. Such qualifications will have to be avoided if the above price forecasts are to be met.

Ends --

www.thomsonreuters.com