With the 1980 record gold price of US$850-per-oz. within sight, high demand and tight supply of the yellow metal has the World Gold Council predicting a new floor to the market will form, making golds future look strong over the long term.
The WGCs third quarter report says that investor interest will continue to be intense during the fourth quarter of 2007, but that jewelry demand will likely fall due to price volatility, especially in more price-sensitive areas like Asia and the Middle East.
Based on past occurences, the WGC expects that those jewelry buyers will regain confidence if the gold price stabilizes.
WGC economic advisor, Jill Leyland, says that there are far more positive factors supporting golds continued rise than negative.
As far as we can see, the fundamentals of gold demand are likely to remain very strong because of the key markets countries like China, India, the Middle East the economic outlook is still very strong for the next year, Leyland says. Therefore youll get people getting wealthier and therefore buying, among other things, more gold.
Leyland says a U.S. recession or slow-down, which she says is not inevitable, would affect the demand for gold there, and that China and India wouldnt be able to avoid the impact all together.
Youd expect slower growth from them, she says.
Supply has been constrained while demand has been very strong, from both the jewelry and investment side, but thats not the only thing.
I think a key factor thats been responsible for driving the gold price up over the past years has been the growing interest by investors, Leyland says. And that itself is generated by several different things.
Leyland says the macro economic environment such things as the falling U.S. dollar over the last five years, political problems such as 9/11, which make gold a safe haven, and concerns about inflation have contributed to the gold price.
She says exchange traded funds, or ETFs, a new way to invest gold which became popular in the market in 2003, brought a wave of new gold investors. ETFs allow an investor to buy an entire portfolio of stocks through a single security that tracks and matches the returns of a stock market index.
The majority of people whove bought ETFs have not been people who were investing in gold previously, Leyland says.
Identifiable investment demand nearly doubled 2006 third quarter levels to 240.7 tonnes from 122.7 due to a record inflow into ETFs. ETF demand increased 617% to 138 tonnes during the third quarter, which were lower during the first half of the year.
WGCs third quarter report says gold demand reached a new record in dollar terms at US$20.7 billion, up 30% from the year before, and a rise in 19% in tonnage to 947.2 tonnes. Jewelry demand rose from the third quarter by 6% to 590.7 tonnes and by 16% in dollar terms.
Gold supply during the third quarter was 16% higher than a year earlier, reaching 1,045 tonnes, but the report says this was not due to in increase in mine output, which was as constrained as ever, but to a sharp reduction in de-hedging and higher central bank sales, as well as scrap sales to a lesser extent.
Thats the only thing that would help increase supply in the next year or so, but not immediately because I think the pressure is still very much to continue de-hedging, Leyland says. (Mining companies) want exposure to what they see to be a price thats still got somewhere to rise.
Leyland says de-hedging, be it not renewing hedges or buying back hedges, cannot continue much longer.
The hedgebook is at just under 1,000 tonnes gold at the moment but reached 3,000 tonnes at its peak.
The WGC report said the increase in supply helps explain the increase in demand in tonnage terms, but that it doesnt explain the rise in the London Historical gold fix, p.m. price, which rose to US$743 per oz. on Sept. 29 from US$648.15 per oz. early in the third quarter.
Since then, gold has risen as high as US$841.10 on Nov. 8.
Leyland says the tight gold supply will likely continue since mine output is not expected to grow rapidly in the near future, but also because the central banks, especially in Europe, have not been meeting the 500-tonne limit for gold sales for the last few years.
It looks like they will continue to undershoot that limit, possibly by a certain margin, Leyland says. It means theres less gold coming on to the market so youve got a reduction in supply and therefore theres nothing to alleviate the pressure on the price.