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Is the Gold Bull Market Coming to an End?

Economic recovery could hit the Gold Price, says GFMS...

WHILE IT is not quite at the end just yet, leading precious metals consultant Thomson Reuters GFMS is of the view that gold's decade-long bull run is beginning to near its close, writes Geoff Candy at MineWeb.

In its second update to the 2011 Gold Survey, the consultancy says once the global macroeconomic picture improves, which it expects could happen in 2013, there is a strong possibility that this will lead to a drop in investment demand for the metal and "a secular retreat in the price will unfurl"".

It does not expect this in 2012, however, although it does see prices trading fairly weakly in the first half, before powering toward $2,000 in the second half of the year.

The reasons for these expectations are numerous and include, GFMS says: "exceptionally low interest rates, enhanced inflation expectations, monetary policy easing and a general mistrust of fiat currencies."

Speaking to Mineweb, just ahead of the report's release, Philip Newman, research director for precious metals at the consultancy said that the investor community has been "all important" in terms of driving prices higher in recent years.

For the course of 2012, Newman says, the consultancy expects the conditions that have led to the jump in investment demand to remain in place. He said he doesn't expect the situation in Europe to resolve itself in the short term, nor does he expect the uncertainties in the US or the Middle East to abate.

"Our belief is that negative real interest rates will remain a feature of this year...[as will the possibility] of quantitative easing by the Federal Reserve and these issues together could encourage investor demand to return to the market."

Speaking at the launch of the event, 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 QE3, 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."

Turning toward, 2013, however, Newman says, while it is difficult to be precise, the group is looking for a reversal in some of these situations during the year.

He says, there isn't necessarily a quick fix to the Eurozone crisis but "as we start to see conditions start to stabilize there, then that does open up the way perhaps for investors to reconsider some of their options.  And again, moving beyond this year, as we start to see perhaps a benign sluggish improvement, improvements in economic growth, yet with inflation potentially moving higher for the reasons we've already talked about, then there may be reasons for central banks start to gradually move interest rates higher.  And therefore that does introduce an opportunity cost for holding gold, and that result in the emergence of some liquidations."

According to Newman it is too early yet to establish where such a floor would be as it depends partly on how quickly investments decline. But, he says, there has been an increase in mining costs over recent years. At the moment, GFMS's all-in cost metric shows around a 10% rise last year to around the US$935 mark for the full year.

That means, he says, miners are currently enjoying a margin of around $600 give or take which is a fairly healthy proposition for the industry overall.

And, he adds, "A number of investors have bought gold for the long term – it's really part of their wealth preservation as opposed to support from a wealth accumulation argument and therefore some of those holdings will be quite sticky going forward.  And of course as the economy starts to improve slowly then it does suggest that jewelry demand will respond accordingly and that should help to provide a relatively solid floor for the Gold Price going forward."

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

See all MineWeb articles.

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