Saturday, April 16, 2011

Economic crisis could push gold price to $1,600, warns report

Gold is the most widely traded precious metal, the price has rallied 27% in the past year. Photograph Chris Collins/Corbis

Gold prices could top $1,600 per troy ounce before the end of 2011 as the fragility of the global economic recovery, fears about inflation and turmoil in the middle east and north Africa drive prices higher.

The price of gold has rallied strongly this year, hitting a new record of $1,476.37 an ounce this week, driven on by concerns over inflation, a weak dollar and the shaky economic recovery.

In its Gold Survey 2011, metals consultancy GFMS said there was growing evidence that buyers may drive prices still higher this year. "There is a higher starting point for each successive investor-led rally in the price. Thus, assuming investment demand will at some point take off again this year, there remains good scope for new highs in the price to be recorded," the consultancy said.

GFMS's prediction comes after a record increase in production of gold last year. The amount of gold going onto the market reached 2,689 tonnes in 2010 as more was mined in Australia, China, Argentina, the US and Burkina Faso.

But the increase was met by soaring demand. Investment in physical bars rose 66% and jewellery demand rose 11% despite rising prices.

"The prospects for gold prices this year remain bright," GFMS executive chairman Philip Klapwijk said. "Investors continue to be concerned about the outlook for inflation, with governments in general showing little appetite to tighten monetary policy significantly."

Gold is the most widely traded precious metal. The price has rallied 27% in the past year and has risen on an annual basis for nine consecutive years.

The price weakened earlier this year but has since rallied. Investment demand for gold fell in 2010 but was still "comfortably" the second highest on record, GFMS reported.

Philip Newman of GFMS said prices were being underpinned by strong demand in India and China as well as by western investors buying into stock-exchange traded funds (ETFs), which offer exposure to the gold market without the necessity of buying the product itself.

In April over 2,142 tonnes of gold were represented by investments in ETFs, up from 1,222 tonnes at the end of 2008. Newman said investors were looking to gold as inflationary fears mounted and the fragility of the economic recovery put governments off from implementing sharp rises in interest rates in the short term.

Global demand for bars of gold was 880 tonnes last year, with India and China accounting for more than half of that. India is also the world's biggest market for gold jewellery.

"We expect investment in gold this year to be supported by the probable spreading of the government debt crisis from Europe to the United States and Japan, especially in light of the huge budget deficits the latter two countries will record in 2011 and the lack of concrete measures they are taking to rein these in," says the report.

But Newman said there was still a long way to go before gold hits the highs seen in 1980 when the price hit $880 an ounce – the equivalent of $2,248 today – driven by a recession, a spike in oil prices and the Soviet invasion of Afghanistan.



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