Gold Prices To Fall: GFMS

While there were no startling revelations at a recent presentation of GFMS’s Gold Survey 2009, the precious metals consultancy that has been one of the most accurate forecasters of gold prices painted a bearish picture for the yellow metal in the short term.

In front of a room full of investors in Toronto on April 7, GFMS research director Neil Meader laid out statistics from 2008 that showed higher gold prices were crimping demand and encouraging more supply.

Particularly discouraging for gold bugs, one chart Meader displayed depicted a line for scrap supply rising and crossing the falling line of jewelry fabrication demand.

“Indications to date point to scrap in the first quarter proving to be some 100 tonnes greater than jewelry fabrication and approaching 80 per cent of the size of mine production,” the 2009 GFMS report on gold reads.

Such a scenario is bearish for the gold price, especially when combined with a forecasted increase in mine production, falling demand for industrial gold uses and less demand created from de-hedging, as most of the major gold miners have already reduced their hedge books.

That leaves only investors as a positive driver for higher gold prices.

“But if only investor demand is strong and all the other factors are weak, that can be a recipe for very volatile prices,” Meader says.

The current retracement that gold has seen over the last month and a half — it has declined from a high of roughly US$985 per oz. on Feb. 23 to its current price in the US$870-per-oz. range — will likely continue before settling in the mid-to-low US$800-range.

In order for such a retracement not to occur, forecasted inflation would have to come sooner than expected. Alternatively, another financial calamity, such as a major bank failing, would provide support to the gold price.

But in the absence of such events, gold investors would do better to sell now and wait for the bottom.

They won’t have to wait for very long, however, if GFMS is correct.

Meader says a rally in the gold price driven by the much talked about coming inflation — a consequence of the loose monetary and aggressive fiscal policies being implemented the world over, but especially in the United States — should come by the end of the year or early in 2010.

He believes prices could go above US$1,000 per oz. with US$1,100 being a realistic high mark.

Another interesting trend Meader identified is that China maintained in newly earned position as the world’s biggest gold producer, while South Africa continued to fall.

South Africa held the No. 1 spot as recently as 2006, but fell to second the following year, and then to third place last year. The U. S. moved into the second spot for 2008.

The shift came as production in South Africa declined by 37 tonnes, while it picked up by 12 tonnes in China. Overall, global mine production fell by 3% or 62 tonnes to 2,416 tonnes for 2008 — the lowest level since 1996.

But GFMS forecasts growth in production for 2009, thanks to increased output from Asia, Australia and West Africa.