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Gold Prices: Bull Market Peaking?

London's GFMS says the bull market in Gold Prices might be entering its latter stages...

PHILIP KLAPWIJK of the GFMS consultancy just took us through his latest gold-market findings – and his comments on them – in a presentation to the Denver Gold Group's European Gold Forum in Zurich, writes Lawrence Williams at MineWeb.

Reviewing 2010 and the start of 2011, Klapwijk noted that the gold price has risen in all currencies, although among the major currencies it has risen most in the US Dollar, signifying continuing weakness in the greenback. The recent rise has been pretty much in line with most major commodities, barring silver – which as readers of Mineweb will well know has been substantially outperforming its big brother for the past several months.

Overall he said that, looking at the chart of the progress in Gold Prices – and comparing it with the ill-fated 1980 runup – we could actually be in the latter stages of the now 11-year gold bull market. But he did mitigate this statement by saying that if one looks at the present day value of the 1980 gold price peak, there could actually be quite a bit further to go in today's money.

Klapwijk does feel though that gold will continue to rise for this year at least and is looking to $1600 per ounce or more at some stage, although he reckons there could be a sharp correction in the interim. GFMS predictions in the past have tended to be on the conservative side, so this forecast may give the gold bulls some hope.

GFMS does pride itself on the quality and accuracy of its research and spends a lot of money in trying to get the fundamental figures right – and there were indeed some slight surprises in some aspects of gold supply last year.

  • Although mine production did rise, by a pretty small 3.8% year on year, this did take it to an all-time high;
  • Scrap sales decreased despite the high Gold Prices;
  • Central banks became net purchasers (just);
  • So, overall supply only rose a pretty infinitesimal 0.4% to 2,689 tonnes.

Despite the higher prices and the mine gold output rise, GFMS reckoned that mine production's all-in costs rose sharply to $857 an ounce. Given this is an average, that puts some producers pretty near the margin in profitability despite current ever-higher Gold Price levels.

Looking ahead to the current year, Klapwijk reckons mine supply will rise again by perhaps 4% and that this year scrap supply will also increase along with the higher Gold Prices, although this hasn't proved to be the case so far in the first quarter. Official sector purchases, he feels, will contribute to demand and he expects investment demand, particularly for physical bullion in India, China and elsewhere, to soak up any additional supply as the economic background for international investment demand in gold as a safe haven remains strong.

Economically, Klapwijk feels Europe is far from out of the woods in its debt management and that even the US's AAA rating status may be at risk if it doesn't do something to try and reduce its deficit – political shift which doesn't yet seem to be on the horizon.

Looking at Chinese demand in particular, Klapwijk pointed out that unconfirmed preliminary figures suggest that Gold Bullion demand in the first quarter alone rose a massive 30-40% year on year, and although he didn't necessarily expect this demand surge to be maintained, he did expect China's investment demand for gold to continue growing substantially. He was not quite so confident on continuing Indian demand growth though.

When asked if he felt there was any likelihood of a European Central Bank offloading some gold to help with liquidity he was adamant that he felt there "was no chance of this whatsoever" as he believed the amounts that could be generated this way were far too small and that it would have too great an adverse effect on sentiment.

Overall, Klapwijk's was a positive assessment of the gold market and price for the rest of the year ahead, although not necessarily one that would give much joy to the raging gold bulls. But as noted earlier, GFMS assessments tend to be on the conservative side and there are many factors out there which could see totally different price scenarios occurring – either way. Gold's bull run may not yet be over, but some experts are nowadays viewing the future with a little more caution.

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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.

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