Gold News

"Gold $5,000" Forecast as 3 Facts Support "Case for Gold" Despite "Inflated" Speculative Betting

Gold Prices held in a tight $4 range below $1,000 an ounce in Asian and early London trade on Tuesday.

World stock markets, bonds and commodities also held flat, and only the British Pound moved sharply on the currency markets, dropping to a one-week low vs. the Dollar on stronger-than-expected UK inflation data.

Producer input prices in the United States rose almost twice as fast as analysts forecast in August, new data showed just ahead of Tuesday's New York opening bell, up 1.7% from July.

"Given the inflated [speculative] positions for the precious metals," forecast one London dealer in a note this morning, "it is difficult to see where the next impetus will come from."

"Investors are very long," agrees MKS Finance in Switzerland, "and Gold will have to further consolidate before attempting another assault higher."

But "The short-term Gold technical picture remains bullish while the $990 level holds," says Scotia Mocatta, the bullion bank.

"We will need multiple down days to shake the bullish sentiment."

Speaking at the annual Gold Forum in Denver, Colorado yesterday, head of the CPM commodities research group Jeffrey Christian noted that "We are now into the ninth year of the current bull market in gold. We have had more investors buying more gold for a longer period of time than ever before.

"They probably will continue to buy even if the economy stabilizes," he forecast.

Current prices need investors to buy 60-70% of world mine production according to Paul Walker of London-based GFMS, thanks to the global drop in jewelry and industrial demand.

"Is that sustainable indefinitely?" Walker asked. "I don't know."

GFMS's latest updates to its Gold Survey 2009 – launched here in London on Monday – forecast a 19% drop in world jewelry demand this year. Overall Gold Investment demand is set to show growth of 478%.

"I think the downside in Gold is limited to 5-10%," said GFMS chairman Philip Klapwijk in Q&A following his presentation. "Whereas we could see other commodities dropping perhaps 30% on a setback."

Noting the huge Jump in Gold Derivatives Bets, "Speculators are rebuilding their positions" after the dramatic halving of open interest in 2008. "That's not to say we can't see a correction from current 'frothy' levels...but [that would] set us up for renewed gains to new record prices."

Looking at scrap-metal supply – spurred by record-high prices across India and south-east Asia, as well as new gold buying operations such as Cash4Gold in the West – the "supply shock" of early 2009 has not yet returned despite higher Dollar Gold Prices, Klapwijk reported, while central banks are now "net purchasers" after acting as "heavy, price-insensitive sellers" every year since 1989.

Jeffrey Christian of CPM Group now forecasts central-bank demand equal to 185-310 tonnes of gold per year, telling the Denver Gold Forum on Monday "that is an extremely conservative projection."

"We must be aware that the bull market will not last forever," GFMS's Klapwijk said in concluding Monday's presentation here in London, highlighting "two warning shots" in the consultancy's long-term global analysis.

First, annual net demand – meaning all gold-product fabrication minus old-scrap supply – has been lagging annual mining output since 2001, creating a surplus this year of some 1,500 tonnes.

Second, and after annual jewelry fabrication first turned lower in 1997, the volume of physical Gold Investment is now close to overtaking it.

For the time being, however, GFMS believes sheer "weight of money" makes a strong case for Gold Investment, firstly because global allocations as a proportion of portfolios remain low; real interest rates after accounting for inflation are low to negative, making the on-going costs of gold storage less onerous; and fears over inflation and the fate of the US Dollar "will only grow" over the coming six months or more.

"Anybody that's long a lot of US Dollars – China being one, maybe the Middle East – they're going to go: 'This thing is going downhill fast'," forecast Gold Mining entrepreneur Rob McEwen, former chief of GoldCorp and current CEO of both US Gold and Minera Andes Inc., at the Denver Gold Forum yesterday.

"[They're going to think] 'We have to get out of it and we're going to buy assets'."

Ending his presentation with a lottery to win a mock $1 trillion bill, reports Dorothy Kirsch at MineWeb today, McEwen forecast a Gold Price of $5,000 an ounce by 2015.

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Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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