GFMS, one of the world’s foremost precious metals consultancies, released its Gold Survey 2008 – Update 2 today, which shows its latest report on the gold market. GFMS’ Executive Chairman, Philip Klapwijk gave a summary of the findings of the report at a presentation in Toronto, organised by the precious metals consultancy.

A key feature of the report is the consultancy’s forecast that gold prices could achieve an all time high in the first half of 2009 as net investment surges. It noted that there has already been several months of rocketing demand, chiefly in Europe and North America, from certain investors, but this has been masked by heavy fund redemptions as cash has been sought to cover losses elsewhere, meet margin calls and so forth. Klapwijk said, “if it hadn’t been for this fund selling, we’d be easily back over $1,000 by now and, as soon as it quietens down, I’m sure a strong rally is going to emerge.”

GFMS believes that the main motivation behind this expected surge in investment is risk aversion and a desire to preserve wealth, as illustrated in its focus being physical bullion, often delivered, or allocated metal accounts. Gold was also seen as benefiting from concerns over the solidity of other assets, including cash, equities or bonds. The latter was seen as particularly important, with Klapwijk commenting “we’ve seen some pretty extraordinary monetary and fiscal policies getting proposed by the US and other governments and this all has the potential in time to spark some serious, and maybe, sustained inflation.”

The consultancy sees gold’s fundamentals as relatively neutral in the near term, with the damage from weak demand being largely neutralised by restrained supply. Scrap in the first half of this year, for example, is only forecast as broadly flat year-on-year and official sector disposals are expected to continue falling. The report still feels that selling will be dominated by the signatories to the Central Bank Gold Agreement (CBGA) and that buying by banks outside this group will remain limited, with no hint made of any purchases by the big dollar holders in East Asia. On the demand side, high and volatile prices plus the slowdown in world GDP growth were forecast to cut jewellery demand by 11%. Jewellery offtake was also estimated to have declined by 11% in 2008, chiefly due to the damage from high and volatile prices, especially in the developing world, and the slide into recession in many countries, in particular the United States. GFMS also sees price expectations as important, with Klapwijk commenting, “in the third quarter last year, we saw a major bounce back in Indian offtake, even though the rupee price was little changed on earlier in the year, – but people thought some decent price gains were in the offing. And without that India-centred rebound, we could easily have seen dollar gold properly breaching the $700 barrier.”

Update 2 also sets out the contribution to demand in the first half of last year from producer de-hedging at an unexpectedly large volume of over 250 t. There was also a fall in mine output in the first half. Supply in total was in fact relatively restrained as central bank selling for the full year fell by 40% or so, while scrap rose by ‘only’ 13%, despite the price hike of 25%, reflecting earlier releases of near market supplies. Despite the contribution from restrained supply and pockets of demand strength, GFMS still see investment as the chief driver of price action last year. The rally to an all time high over $1,000 in March, for example, was ascribed by GFMS to a ‘perfect storm’ of such factors as dollar weakness, oil price gains and financial instability, both actual and feared following the collapse of Bear Stearns. The slump in prices, particularly after the July price spike, to around $700 by the fourth quarter was also attributed mainly to investors. This was initially said to be largely the product of selling inspired by dollar gains and a general exodus from commodities as world GDP growth estimates were cut. However, it was the later ‘forced’ selling by the funds that proved particularly undermining. Finally, the emergence of heavy physical buying towards year end was said, according to GFMS, to be at the scale of being sufficient to have swung implied investment activity from net selling in the third quarter to net inflows in the fourth and to have laid the bedrock for future price gains.

The GFMS said mine production in 2008 fell by a provisional 88 t, its third consecutive year of decline. Losses were recorded in a wide range of countries but much was attributable to Indonesia, South Africa and Australia. In contrast, gains were recorded for China and Russia. Output in the first half of 2009 is forecast to grow slightly, although that is in comparison to a weak first half in 2008. Producers’ total cash costs rose by 22% year-on-year to an average over $470/oz for the nine months to end-September.

Net official sector sales fell by over 40% to just under 280 t in 2008. This was mainly due to lower sales by CBGA signatories, a change in turn largely driven by the disappearance of Spain as a seller, while central banks outside this group continued as small scale net purchasers. In the first half of 2009, total net sales are forecast to fall yet further year-on-year.

Higher gold prices and more distress selling helped lift scrap supply by around 13% in 2008, although the total remained below the 2006 record, reflecting how much near-market supplies had emerged then. Much of 2008’s rise was due to the Middle East, with increases in the other major regions a more modest 6-10%. First half 2009 volumes are forecast as roughly flat year-on-year. www.gfms.co.uk