Commodities | Sep 22 2009
By Chris Shaw
The move in gold prices through US$1,000 per ounce has not just been a move in US dollar terms, Barclays Capital noting the metal price has also risen in terms of the Indian rupee to a record high of 15,949 rupees per 10 grams of gold. But while the price of the precious metal is close to its nominal peak, it remains as much as US$600 per ounce away from its inflation-adjusted high, while the gain this year of 14% is not so impressive given copper has doubled over the same period.
Driving the gold price higher has been a surge in investment demand, as physical Exchange Traded Product (ETP) holdings and Comex speculative positions have hit an all-time high, while coin sales in the US year-to-date are already above the total for all of last year. But while investment demand has risen, Barclays notes just as important have been changes in the underlying supply and demand dynamics of the market.
GFMS, a specialist in the precious metals sector, recently released its Gold Survey Update 1 figures, which show mine output increased in the first half of this year by around 7% in year-on-year terms, with further growth expected in the second half. This should be at a slower pace however, the forecasts calling for growth of 1% in the current half-year. As well, GFMS figures suggest scrapped gold, which Barclays points out is the most responsive to the price of the metal, is also likely to grow in coming months.
On the demand side, while jewellery demand is expected to increase compared to the first half of the year, it should remain soft in year-on-year terms, while producer buybacks are also likely to slow given the decline in the size of the global hedge-book.
To Barclays this suggests the usual market dynamics of subdued mine supply meaning jewellery demand provides something of a floor for the gold price, while de-hedging is the wild card in terms of a demand boost has been reversed, as mine supply is on the way up at the same time as buybacks and jewellery demand are declining.
This change in market fundamentals doesn’t lend support to prices in the group’s view, even allowing for the likelihood of official sector sales switching back to net buyers of the metal. This implies prices remain dependent on investment demand and leads Barclays to suggest while a sustained move above the US$1,000 per ounce level is possible in coming weeks, greater support is likely to emerge on the other side of a short-term correction in the gold price.