Johannesburg - Gold prices could "easily re-attain the $1 000 mark and may well push up towards and perhaps even through the $1 100 barrier in the coming months", precious metals consultancy GFMS predicted on Tuesday.
"The price may have pulled back a fair bit from the February highs but that was largely just the market's reaction to jewellery demand crumbling and scrap booming," said GFMS executive chairperson Philip Klapwijk.
"It's far from game over for investors, and it will be that crowd which sets the price alight," Klapwijk said.
Releasing its latest review on the gold market, Gold Survey 2009, GFMS singled out the fiscal and monetary policies currently being enacted, especially by the US administration, as the root cause of gold's potential.
GFMS also expect central banks to be reluctant to raise interest rates while the prospects for economic growth are shaky and that the solidity of the US dollar has to be called into question, chiefly as a result of doubts over others' desire or ability to continue financing an explosion in US
government debt.
Strength in investment will certainly be needed to overcome weakness in the fundamentals.
No straight line rally
"So far this year, we've seen times when major fabricating countries like Turkey have been exporting bullion because jewellery demand had collapsed and scrap was so strong. There's no way that's sustainable even in the medium term and I'd argue that's the main reason the rally this year failed in the US$980s," said Klapwijk.
But the consultancy cautioned that it may well not be a straight line rally as a summer lull or the need for inflationary pressures to build could mean sub-$900 prices in the short term.
The report details a similar complex path last year as heavy net investment and record prices highs in the first quarter, on the back of surging oil prices, a weak dollar and financial turmoil such as the collapse of Bear Stearns, was followed by periods of heavy selling through into the fourth quarter.
Much of this was ascribed to the general sell-off in commodities as economic growth foundered, a turnaround in the dollar and, towards the end of this phase, funds being obliged to sell in order to cover losses elsewhere, to meet margin calls and so forth.
In the final four months, GFMS noted a ground swell in investment in physical gold, reflecting distrust in financial institutions, especially after the collapse of Lehman Brothers, and a more general desire for wealth preservation, with this buying centred on Western Europe and North America.
This desire for investment in physical form was illustrated in the 40% rise in official coin minting - the only area of fabrication to register an increase in 2008, according to the latest GFMS report.
In contrast, jewellery demand fell by just over 10% in response to high and volatile prices and the slowdown in economic growth.
The year was far from uniform, but Klapwijk said jewellery demand came back in force in the late summer as prices sank through the $800 mark, and even more so as it headed for $700.
"And if that buying hadn't appeared, we could have easily seen far lower prices than was the case," Klapwijk said.
Demand in other quarters was seen as mixed with electronics offtake, for example, withered as the economic crisis developed and de-hedging by producers fell sharply in the second half, after a surprisingly buoyant first half.
"It's a concern for the stability of prices that we're entering a period in which for the first time in many years de-hedging will be running at trivial levels, although that's only a function of the much reduced hedge book," said Klapwijk.
Surge in scrap prices
"We're still seeing very limited interest in strategic hedging," he added.
Actual mine production was reported to have continued its declining trend, with notable losses seen in South Africa and Indonesia.
The scale of the drop came as something of a surprise, but of far greater importance to the price was the surge in scrap to a record high.
Much was driven by high prices in the developing world, especially the Middle East and in particular Turkey, although distress selling as a product of the economic crisis featured as a reason behind high levels of recycling in the industrialised world.
A good part of the overall increase in scrap, however, was neutralised by the marked drop in net official sector sales.
This was said to be chiefly the result of low levels of selling by the Central Bank Gold Agreement countries, although net buying by countries outside this grouping also featured, particularly in the fourth quarter.
- I-Net Bridge