By Stuart Burns
Has gold peaked? Good question, and the answer is as much around what is driving demand as it is who you ask.
Certainly a Reuters article this week goes into considerable detail about the physical supply and demand balance expected to influence the price during 2013. Thomson Reuters GFMS said on Wednesday that persistent concerns over the health of the U.S. economy and pressure on the dollar will send gold prices to a record average high during 2013, predicting the metal's 12-year bull run will then top out late in the year. The firm is quoted as saying gold investment, fueled by negative real interest rates and debt concerns, will drive prices higher in the first six months of 2013, offsetting a dip in jewelry demand and a rise in mine and scrap supply.
In an FT article, Philip Klapwijk, head of metals analytics at Thomson Reuters GFMS, is quoted as saying, "What we're seeing is a fairly extended pause and period of consolidation before gold makes another move higher. The U.S. is bound to lose its triple A rating." Noting that Standard & Poor's stripped the U.S. of its triple-A rating in August 2011, helping to drive gold prices to a nominal record of $1,920 a troy ounce before it fell back in 2012. If other ratings agencies were to make the same move it would be seen as supportive for gold, as many more holders of U.S. government debt will be forced to sell and seek "safer" homes for their money.
So much for the financial and macroeconomics. Going back to Reuters, GFMS expects gold to average $1,847 an ounce in the full year but forecasts suggest it will peak in late 2013. The firm expects prices to remain extremely elevated in the first half of 2014, forecasting a surge in implied net investment -- which covers activity in exchange-traded funds, futures, and over-the-counter trading -- in the next six months of this year to 152 metric tons, compared to 59 tons in the first half of last year. That is expected to balance a projected 4.2%, or 40-ton drop in jewelry off-take, a 20-ton rise in mine output and a 57-ton increase in scrap supply. Jewelry demand fell last year, led by India (down 11% to 634 tons) and China as the economy slowed. GFMS expects India to fall further this year, down an additional 9% in the first half as the economy there slows further, but expects demand to pick up in China on the back of recovering growth.
Investment demand for gold at 354 tons and physical bar demand at 961 tons last year are dwarfed by jewelry demand at 1,885 tons, yet GFMS is expecting net investment demand to be the main price driver during 2013.
Are they right?