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Investor Demand Could Push Gold to Record in 2009
By Matt Whittaker
Wall Street Journal
Wednesday, March 25, 2009
NEW YORK - The rising economic uncertainties related to recessionary conditions and increasing joblessness, ever more volatile and vulnerable financial markets and weakening economic conditions that helped spur strong investment demand for gold in 2008 could send gold to record highs above $1,000 this year, CPM Group said Tuesday.
A shift may also be afoot in official-sector gold transactions, with central banks, long net sellers, potentially becoming net buyers, CPM Group's managing director Jeffrey M. Christian said late Tuesday at the release of this year's closely followed CPM Gold Yearbook. "Investors are concerned about the preservation of the value of their assets amid the massive destruction of wealth over the past year," the commodities research and consulting firm said in the yearbook.
"Amid the continued inclination to acquire safe haven assets around the world, investor buying is projected to reach a record 52.3 million ounces this year," the group said.
Investors continued to buy large quantities of gold last year, totaling 43.3 million ounces. This was slightly lower than the 44.0 million ounces bought in 2007.
Meanwhile, central bank gold sales have been falling and could fall further.
"They may actually turn into net buyers, which is something we had not expected," Christian said.
In the publication, CPM Group said that last year official sales, mostly from central banks, declined to 5.8 million ounces from 15.9 million ounces in 2007. This reduced the total available supply to the gold market to 120.7 million ounces from 127.0 million ounces in 2007.
This year official transaction sales may be no more than 5 million ounces, and total available supply may be 123.6 million ounces.
"Most central banks may have sold much of the gold that they have wanted to sell over the past two decades," CPM Group said in the report. "They may sell much less going forward and are likely to sell less given current economic conditions."
CPM Expects New Gold Record
Combined with short term and speculative activity, CPM Group expects gold prices to surpass last year's record intraday high of $1,033.90, seen on March 17, 2008.
"I'm very bullish on gold from a long-term perspective," Christian said. The metal is in a "secular upward shift" and Christian sees "a long-term rehabilitation of gold as an asset class."
With gold outperforming other assets but still representing only about 0.6% of global financial assets, investors are becoming more interested in holding the metal as an investment asset and form of savings, Christian said.
However, although expectations of higher inflation stemming from government fiscal moves to assuage the economic crisis have supported gold recently, Christian said hyperinflation isn't necessarily "pre-ordained" as the broad money supply hasn't expanded as much as the narrow money supply.
Gold prices will probably rise over the next week or two before pulling back into the third quarter, although the yellow metal will likely stay above $800 an ounce, Christian said.
He attributed his expectations that gold will rise in coming sessions to the March 31 first-notice day for April gold futures on the Comex division of the New York Mercantile Exchange.
That could lead to participants buying back previously sold positions, shorts buying the metal to be able to deliver it or, as is more common, rolling contracts forward. All of that is potentially bullish for gold in the near term, Christian said.
The end of March also poses potential market concerns that could lead to safe-haven buying in gold. GM and Chrysler face a March 31 deadline to present the government with updated restructuring plans that are to include details of the debt exchange and a revised labor deal.
For gold prices to come off significantly and trade for a sustained time below $700, there would have to be "a sharp reduction" in financial-market and economic anxiety, Christian said.
Fabrication Demand Could Fall Further
Partly reflecting the rise in prices, last year fabrication demand, which consists mostly of jewelry as well as electronics, dental, medical and other uses, declined to 77.4 million ounces from 82.9 million ounces in 2007.
This year total demand is projected to fall further, to 71.3 million ounces. Consumer spending on discretionary items, such as gold jewelry, is expected to remain weak this year.
Jewelry demand could fall to 56.5 million ounces in 2009 from 60.8 million ounces last year. Industrial demand, meanwhile, could decline to 14.8 million ounces from 16.6 million ounces.
It is estimated that total gold supply rose to 114.8 million ounces last year, up 3.4% from 111.1 million ounces in 2007. Mine production continued to decline last year, to 55.3 million ounces from 58.7 million ounces in 2007. Secondary supply, meanwhile, surged to 38.5 million ounces in 2008 from 32.4 million ounces in 2007.
This year total supply could rise further, to 118.6 million ounces. Mine production may rise to 57.2 million ounces, secondary supply to 40.5 million ounces and transitional economy sales may hold steady at 21 million ounces.
SOURCE: http://online.wsj.com/article/BT-CO-20090324-717371.html
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