In September gold hit a record of $1,920 an ounce but an annual survey from Thomson Reuters predicts the price will rise again as investors search for a safe haven from US economic woes and low interest rates in Europe
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Gold prices are on the march again. Forecast to power past $2,000 (£1,300) an ounce later this year or in early 2013, the prices will be underpinned by fearful small investors in Germany and Switzerland buying ever more bars and coins, as well as rising demand for gold jewellery from India’s and China’s burgeoning middle classes.
The Thomson Reuters GFMS annual gold survey, published on Tuesday, reveals that global investment in gold jumped more than 20% last year to a record $80bn, pushing the price to its peak of $1,920 an ounce in September. Much of this was due to physical buying of bullion: purchases of gold bars rose by more than a third to almost 1,200 metric tonnes, particularly in China, Germany, Switzerland and Austria. East Asia accounted for 456 tonnes of the total (up 53%), western markets bought 335 tonnes (up 41%) and India 297 tonnes (up 9%).
Philip Newman, research director in precious metals at Thomson Reuters GFMS, said that with the spectre of 1920s hyperinflation haunting Germans, the last two years have seen strong growth in the number of smaller investors buying gold bars and coins. “For many years now, these German-speaking markets have had a well-developed infrastructure for consumers to buy product.”
Demand for gold jewellery dipped by 2% but remained resilient last year, thanks to strong demand from India and China. Demand is predicted to hold up this year, even though the rupee has weakened and there will be fewer auspicious days in India than in 2011 – days marked out in the Hindu calendar as lucky for events such as marriage, buying and selling.
The Thomson Reuters report also predicts the gold market is nearing the closing stages of a decade-long bull run – assuming economies start to recover next year and interest rates begin to rise. The price of spot gold has leapt from $272 an ounce at the end of 2000 to around $1,644 today, a six-fold increase.
In the months since September gold has lost its shine as investors piled into dollars instead, seen as the last remaining investment haven.
The report suggests that having climbed by 28% in 2011, prices may struggle in the short term and only achieve an average of $1,640 in the first half of 2012, before rising towards $2,000 later in the year. Even then, allowing for inflation the gold price would still be some way off their $2,500 inflation-adjusted peak in 1980 that followed the oil price shock in the wake of the Iranian revolution.
Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS, said: “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 [a third round of quantitative easing], 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.”
The report predicts that the second half of the year will see the return of concerns about the health of the US economy, prompting a fresh round of quantitative easing. Newman said despite some encouraging recent economic indicators in the US, the country’s huge debt problems remain unresolved and are unlikely to be tackled during an election year, which will make investing in the dollar less attractive. Coupled with exceptionally low interest rates across Europe and the US, and rising inflation, this should benefit bullion.
A survey of mining executives by PricewaterhouseCoopers last week found that 80% of mining companies expected the price of gold to continue to increase this year, with the majority expecting it to peak at $2,000 an ounce. Tim Goldsmith, global mining leader at PwC, believes that amid the current market volatility, companies that are flush with cash will swoop on smaller players, which are more vulnerable to market fluctuations and have difficulty raising capital.
Volatile financial markets have prompted countries around the world to step up their gold purchases. Central bank purchases are estimated to have jumped to 430 tonnes last year, which also encouraged private sector investment. The Bank of Korea made two major gold purchases – 25 metric tonnes in June and a further 15 metric tonnes in November – the first time it had bought gold since the 1997-1998 Asian financial crises.
Goldsmith said: “This is a trend we are seeing not only in developed economies, but emerging markets have also shown interest in boosting their gold holdings. We believe countries are now entering into a long-term period of gold accumulation. Given the relatively low amounts of gold available for purchase, countries with substantial foreign currency reserves that wish to diversify away from US dollars must do this over a long period.”
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