Good prospects for gold

Brendan Ryan | Mon, 01 Feb 2010 19:30
[miningmx.com] -- PROSPECTS for gold look good over the next 12 to 18 months according to both GFMS CEO Paul Walker and DundeeWealth Economics president Martin Murenbeeld.

That’s according to their presentations delivered at the Mining Indaba conference in Cape Town on Monday but the two differ over their longer term prospects for the metal.

Walker’s prediction on where the gold price could go in the next year was more bullish than that made by Murenbeeld but he is extremely concerned about the growing influence of investment demand in the gold market.

He told delegates, “I am bullish on gold for the next 12 to 18 months. A gold price of $1,400/oz would not surprise me. But we are now near a point where I have to question the sustainability of some of the drivers behind gold. Quite where the turning point will come I do not know.”

Murenbeeld’s forecasts were for gold to average $1,172/oz during 2010 and end the year at $1,234/oz while he forecast an average price of $1,280/oz for 2011.

Murenbeeld was unable to attend the conference for medical reasons and his presentation was given on his behalf by conference programme director Tim Wood.

Murenbeeld said he had nine bullish arguments in favour of gold and six bearish ones against the metal which were “not as compelling”.

He said mine supply of gold was flat with “anaemic ” growth prospects while global foreign exchange reserves held in US dollars were excessive.

This was likely to lead to a diversification out of US dollars and into SDRs (special drawing rights), other currencies and gold.

Murenbeeld also believed investment demand for gold was in a long run uptrend because of fears over inflation and the debasement of currencies.

Walker’s views on future investment demand for gold were markedly more bearish although during his presentation he frequently denied that he was a “gold bear”.

“It’s probably more that I am a man who sees the glass as being half empty while Martin sees it as being half full,” he quipped.

Walker pointed out that jewellery fabrication demand for gold excluding scrap had halved since 2000 and had dropped particularly sharply since 2007.

He told delegates, “this is a pivotal concept. Investment demand for gold has become so dominant that for long periods of time every single ounce of gold produced has gone into the hands of an investor.

“What you have is a breakdown of the benign relationship between investment demand and manufacturing demand. For the last few years there has been a sharp increase in the amount of gold that does not have a home in a fabricated product.

“That is of concern to me because I believe the physical underpinning to the gold market is hugely important.”

Walker said estimates were that up to three times the current world annual mine production of gold was now stored in vaults in the City of London.

“That’s fine as long as you believe these people will hold onto the gold. The problem is that this gold now sits in above ground stocks that are just a mouse click away from the market place.

“A lot of that gold is in what I term ‘sticky’ hands - God help us if I believed it were not - but some of it will be mobilised into the market and when that turning point comes the downside risk to gold becomes significant.”

Walker believed the trigger for the sale of some of that gold could well be a return to positive real interest rates. He said that to keep the gold price where it was today there had to be constant flows of cash into the gold market.

“The moment you see rising positive real interest rates you will have a problem justifying why investors will continue to fund the gold stocks that have built up in London. The opportunity cost of holding onto gold will become a material factor.

“I am also a sceptic about the inflationary argument in favour of gold but, if there are enough people out there who do buy into it, then you can remain comfortably bullish on gold for the next 12 to 18 months on that context,” he commented.