Investment flows to prop up gold - GFMS

David McKay | Mon, 19 Jul 2010 18:47

[miningmx.com] -- INVESTMENT flows are the single, most important factor keeping the price of gold at its current high levels amid signs of little to no net fabrication demand.

This is the view of , CEO of GFMS which is soon to launch its inaugural 10 year forecast of the gold price.

Speaking to Metal Heads, Miningmx's weekly podcast programme, Walker said that in the shorter term is was demand from investors that was continuing to drive the metal price.

"To maintain gold at current levels you have to have investment flows every hour of every day," said Walker. He added that taking the demand for scrap out of the equation, there would be little net fabrication demand for gold notwithstanding massive demand for gold in jewellery.

Gold fell more than one percent to a two-month low at $1,177.15 an ounce on Monday as increased appetite for assets seen as higher risk, such as equities and industrial commodities, dented the metal's appeal as a haven, Reuters reported.

As for the 2,500 tonnes per year produced in new gold from the world's mines, this was headed directly into the hands of investors.

However, an increase in interest rates was the main economic reason why demand for gold was likely to slip.

"If you can make an argument for rising investment demand for gold then the price of gold is likely to stay where it is. But I haven't seen an asset class where investment flows are only up. Take that [investment demand] away and you've got a good argument for gold going down," he said.

"Will people continue to buy gold for the remainder of this year? Yes, they will. But there is a juncture coming, in 2011 or 2012 where the tide starts to turn," Walker said. "The single economic factor that will influence investment flows is interest rates," he added.

In compiling its 10-year forecast on the supply, demand and future prospects of the gold market, GFMS has established a base case related to economic fundamentals and then used two scenarios for the gold price.

The gold price slipped 1.5% last week which had undermined confidence in the metal, Reuters cited analysts as having said. Some short-term investors spooked by its failure to hold above $1,200 an ounce, they said.

"Liquidation of long positions is weighing on the gold price today," said BNP Paribas analyst Anne-Laure Tremblay. "The liquidation is taking gold closer to closely watched technical levels, and this has potentially initiated further selling."

"Gold's lack of momentum has turned investors away from the metal -- for now," she added. "This may well continue for a while unless the (bank) stress tests results prove worrisome."