Gold to hit US$2,000 before rally ends in 2013: GFMS

A report by Thomson Reuters-owned metal market analysis firm GFMS predicts the price of gold will rally to all-time highs later this year before reaching the closing stages of its decade-long bull run sometime in 2013.

With the price of gold having risen by 28% in 2011, the authors of the Thomson Reuters GFMS report suggest the short-term outlook for gold is weak, with an average price forecast of US$1,640 per oz. gold for this year’s first half. Liquidity concerns, distress selling, a rising U.S. dollar and an expected seasonal decline in Chinese gold purchases stemming from the end of the Chinese New Year may all put downward pressure on the gold price. 

Nevertheless, the gold market should shrug off any lethargy and power ahead to new heights later in the year with an average price forecast of US$1,840 per oz. in the second half, according to the report’s authors. 

Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS, stated in a Hong Kong presentation that “the re-emergence of U.S. 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 and September followed on from the U.S. debt ceiling impasse and downgrade . . . we could even see prices just over the US$2,000 mark later this year or in early 2013.”

Speaking in a presentation in London, Philip Newman, research director for Thomson Reuters GFMS, argued the overall macroeconomic backdrop remains supportive for investment in gold. The eurozone debt crisis is continuing, with more aggressive monetary easing expected by the European Central Bank; a possible third round of quantitative easing by the Federal Reserve; short-term interest rates in major economies at low levels or close to zero; inflation possibly becoming a significant factor in the medium term; scrap supply declining slightly; and the official sector making large gold bullion purchases. He notes these factors will be slightly offset by a small increase in mine production, a stronger U.S. dollar and lower jewellery demand.

In another recent report by PwC, where the firm surveyed mining executives from 40 senior and junior gold mining companies, 80% of respondents said they expect the price of gold to go up in 2012. Just 6% predicted the price will go down, while 14% expected it to remain the same. More than half of the participants said they expect the gold price to break past US$2,000 per oz. this year. 

Whereas PwC’s survey suggests mining executives expect prices to remain high for several years to come – their average gold price used in mine planning for 2012 is anticipated to be US$1,420 per oz., compared with $1,130 per oz. in 2010 – Thomson Reuters GFMS contends the gold market is headed for a longer-term decline in 2013.

According to the report, once the macroeconomic backdrop changes for the better, investment and interest in gold will fade and a secular retreat in the gold price will unfurl. 

Global investment in gold increased 20% in nominal terms in 2011 to US$80 billion, with physical buying of bullion the primary investment vehicle. “Something that is sometimes forgotten is that you must have continuing levels of investment coming into the market at current levels simply to maintain gold prices where they are, let alone to consider the eventuality of prices moving higher,” Thomson Reuters’ Newman argues.

ETF holdings continued to grow in 2011 but only by 7%, much less than 2010’s 20% jump. Meanwhile, net investor long positions for Comex futures fell by 90,000 contracts year-over-year in 2011, with total investment in the gold market down 7% in tonnage terms. 

PwC’s report, titled “Duking it out with ETFs,” argues “the game has changed” for the mining industry. Investors and executives alike should expect continued volatility in the equity markets, higher production costs, labour issues and increased government involvement throughout 2012.

Despite higher revenues, huge margins and excellent balance sheets, the shares of many gold miners have yet to reflect the higher price of gold. PwC says ETFs are partly to blame. Through Dec. 15, 2011, gold stocks within the S&P/TSX Global Gold Index had declined 10.6%. Meanwhile, total holdings of gold in ETFs rose by 5.5 million oz., on top of the almost 11 million oz. added in 2010. “Mining companies have perceived strikes against them – strikes literally being one of the strikes against them,” PwC notes. Gold mining stocks are perceived as being inherently riskier than an ETF, with their higher odds of suffering from resource nationalism, supply chain issues or other factors.

The firm suggests hiking or initiating dividends to attract investors back to cash-rich gold miners. According to its survey of mining execs, when asked how they would use more cash in 2012, 27% of the respondents selected paying dividends, up from 9% the year before.