Market is remonetizing gold, and GFMS is sore about it

Investor Appetite Drives Gold to New Peak

By Chris Flood
Financial Times, London
Wednesday, January 13, 2010

LONDON -- Investors bought more gold than buyers of jewellery for the first time in three decades in 2009, highlighting the increasing impact of speculators on bullion prices.

GFMS, the consultancy that compiles benchmark supply and demand data on the metal, said investment demand doubled to 1,820 tonnes last year, while jewellery purchases fell 23 per cent to 1,687 tonnes, a 21-year low.

The data provide the clearest indication of the huge role investors played in driving gold to a record high of $1,226.10 a troy ounce in December.

Philip Klapwijk, GFMS executive chairman, said he sensed that a "large amount of money" was poised to enter the gold market this year. He predicted a "bumpy" return to record prices by the summer on the back of loose fiscal and monetary policies and US dollar weakness.

He warned that although investors could buy more gold this year, the market would become "increasingly vulnerable" to a severe correction when the circumstances favouring investment disappeared.

He said: "As the macroeconomic environment gradually normalises, the gold market's dependence on investment will become all too apparent with a substantial price retreat at that point on the cards."

The surge in gold prices, from $250 an ounce in 1999 to last year's record, has depressed jewellery sales, traditionally the backbone of consumption. Gold was trading on Wednesday at $1,128 a troy ounce.

The global economic crisis has also affected demand, particularly in India, the world's largest buyer.

GFMS said jewellery demand had fallen by almost half since reaching a peak of 3,294 tonnes in 1997. Traders said gold prices needed to drop below $1,000 an ounce to ensure a revival in jewellery demand, as the currencies of some key consuming countries, such as India and Turkey, depreciated against the dollar, increasing the local cost of bullion.

On the supply side, China cemented its position as the world's biggest gold producer. A further fall in South Africa's output, down 5 per cent on the year, saw it relegated to third position behind Australia. It had been the top producer for more than a century until 2007.

Global mine supply rose 6 per cent to 2,553 tones, a six-year high, helped by a large jump in output from Indonesia, up 55 per cent to 146 tonnes following a recovery in production at Grasberg in Indonesia, the world's largest gold mine, jointly owned by Freeport-McMoRan.

GFMS said it expected mine supply to continue to rise in the first half of 2010, helped by a number of new projects that have entered production.

However, the most significant supply side change last year was the rise in scrap gold supply, up more than 26 per cent to a record 1,541 tonnes, as consumers recycled unwanted jewellery in unprecedented quantities.

GFMS said that further growth in scrap supply might be possible but the consultancy noted that industry contacts had started talking about the possible depletion of near-market supplies.

Net sales from central banks dropped 90 per cent to 24 tonnes in 2009, the lowest level in more than two decades.

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