By Jack Farchy
Published: April 14 2010 14:08
The current price of gold is unsustainable in the long term and prices will have to fall to stimulate demand in the jewellery sector, the precious metals consultancy GFMS has said.
But the group, which compiles industry benchmark supply and demand statistics, also predicted that gold prices would move higher in the short to medium term, and said it was “very likely” that gold would exceed $1,300 a troy ounce within the next 6-12 months.
Gold hit an all-time high of $1,226 in December and on Wednesday was trading at around $1,157.
Demand from investors for the yellow metal soared last year, overtaking jewellery demand for the first time since 1980, GFMS said on Wednesday in its annual report on the gold market.
Philip Klapwijk, executive chairman of GFMS, said a “hefty drop in prices” would be needed to boost jewellery and bring the market into equilibrium.
Investor inflows would need to be maintained near current record levels to take up the slack from lower jewellery demand, he said. But while continuing jitters over the strength of the global recovery may sustain investor demand in the near term, Mr Klapwijk believes it is unlikely to be maintained in an environment of rising interest rates.
“It is difficult to argue that prices could be sustainable” in the long term, he said. “This is a market that has moved out of kilter with its underlying fundamentals.”
Investment in gold more than doubled in 2009 to $58bn, with exchange-traded funds drawing high levels of interest.
Mr Klapwijk said any return of concerns about the global recovery – especially the state of US government finances – would trigger renewed investor interest in gold and may push it to new highs.
But in the longer term, he said, investment demand would not be able to offset subdued demand for jewellery.
Jewellery demand is sensitive to price, particularly in the key market of India, the world’s largest gold importer. A record high average gold price of $972 in 2009, combined with financial pressure on consumers, sent jewellery production 19.8 per cent lower to a 21-year low, according to GFMS data, the industry benchmark.
Mr Klapwijk said there had been some improvement in demand for jewellery in early 2010, particularly in India and China, but he said this was unlikely to be sustained at current prices. He attributed the improvement to seasonal factors such as the Chinese new year, as well as consumers bringing forward gold purchases in expectation of even higher prices.
Prices would need to fall below $900 to revive the fortunes of the jewellery market, he said. “At $700 to $800, you’d see really good demand from places like India.”
On the supply side, high prices have increased the rate at which gold is being recycled, with scrap gold reaching 1,674 tonnes in 2009, up 27 per cent from 2008. Mine production, meanwhile, increased by 7 per cent to 2,572 tonnes. Mr Klapwijk predicted production would remain steady in the next few years.
Copyright The Financial Times Limited 2010.
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