TORONTO -- Gold prices will likely eclipse last year’s record levels in the first half of the year, as stronger investment demand offsets the impact of relatively weak jewellery fabrication and lower de-hedging activity, a closely watched report said Wednesday.
Gold could average US$1,175 an ounce in the first half of 2010, up from last year’s average of US$972, GFMS, a London-based consultancy, said in an update of its Gold Survey 2009 report.
The metal leapt 25% last year and hit an all-time high of US$1,226.10 an ounce in December, helped by the weakening U.S. dollar and gold’s appeal as a hedge against inflation.
It has since retreated by about 8%, and was at US$1,129 an ounce on Wednesday.
Philip Klapwijk, chairman of the consultancy, said those factors should continue to benefit gold, as the economic recovery would likely be sluggish, with a fair chance of a "double dip" in the United States, Europe and Japan.
“This suggests that there may be little or no tightening of fiscal and monetary policies this year in a number of major economies,” he said.
Central banks are likely to keep interest rates near zero for most or all of the year, while government debt levels will continue to rise, raising the spectre of a prolonged slide in the U.S. dollar and higher inflation in the future.
“These are factors that are driving portfolio managers to look for further opportunities to enter the gold market,” Mr. Klapwijk said.
However, the consultancy said the metal’s increased dependence on investment demand — global investment exceeded jewellery demand last year for the first time since 1980 — leaves gold “increasingly vulnerable to a major correction when the circumstances favoring investment disappear.”
Producer de-hedging — or the elimination of contracted future sales — which helped drive gold higher late last year on the back of Barrick Gold’s move to close its hedge position, should be fade sharply in 2010 due to the much smaller global hedge book.
Jewellery demand should recover modestly in the first half from 2009, when consumption was derailed by the global recession. However, it should remain historically weak in 2010 and could slide later in the year as pent-up demand from last year fades, GFMS said.
Global mine supply should rise modestly, including a 3.9% year-over-year gain in the first half, but the gains are unlikely to have a big impact on gold prices, GFMS said.
Official sector sales — generally central bank sales — should also rise after a sharp 90% decline last year, when economic uncertainty drove central banks to be net buyers in the latter part of the year.
GFMS sees the sector returning to selling this year, with expected net sales of 69 tonnes expected in the first half.
Both these factors should be offset by a sharp drop in scrap sales from last year’s record level of 1,541 tonnes, as 2009’s price surge combined with a difficult economy prompted many consumers to sell unwanted jewellery.
