JOHANNESBURG (miningweekly.com) - World investment demand for gold jumped from 885 t at the end of 2008 to 1 820 t at the end of 2009, accounting for a year-on-year gain of 105%.

The yellow metal, which is generally seen as a safe haven investment, has been luring investors looking for insurance against uncertainty during these unpredictable times.

Rand Refinery head of global markets John Reid tells Mining Weekly that the company’s sales of Krugerrands have increased from about 2 000 oz/week in mid-2008 to a high of 15 000 oz/week, and currently stand at around 10 000 oz/week. Reid predicts that these high levels will be maintained for the foreseeable future.

Reid explains that this high demand for physical gold and gold-backed exchange-traded funds (ETFs) was initially spurred when the economic crisis first hit more than a year ago. Investors wanted to secure some safer assets, away from other unstable investor vehicles, such as property, equity, bonds and shares. The aim was to increase the existing holding of gold in company portfolios.

South African Gold Coin Exchange chairperson Alan Demby agrees, adding that the dramatic collapse of economic markets has once again brought the importance of gold as an asset class and a crucial insurance of company portfolios to the forefront.

“We have always recommended that people include a number of different assets in their portfolios and attribute about 10% of their holdings into gold. However, in the early part of this decade, people were not interested in gold. In fact, even England’s Gordon Brown sold off the country’s gold stocks.

“Today, people realise the importance of including gold in their investment portfolios. At the end of the day, [investing] about 10% stock in gold will only give you marginal returns on your investment, but it is the ultimate insurance policy against financial risks and that is priceless.”

In the longer term, prudence alone could keep investors in gold. Reid says that people are concerned about the loss of integrity in financial markets.

A weaker US dollar encourages investors to stay or even increase their investment in gold, taking into account that most commodities are dollar-priced.

Demby points out that South African demand usually rises with a weaker rand, rather than when the dollar gold price rises. The rand rallied by 28% against the dollar last year, making it the second best-performing currency after the Brazilian real.

“I suppose a weaker dollar may give rise to a stronger dollar gold price, but the stronger rand will result in a lower rand price for gold, which is not preferable for South African mining companies.

“However, there has been a trend over the past couple of years away from investment in mining companies towards investment in physical gold. Currently, the amount of gold in gold-backed ETFs is about £50-million to $60-million, making it seem that even the investment gurus prefer to own physical gold these days,” Demby adds.

But physical gold provides liquidity and is seen universally as the ultimate form of insurance against financial woe.

Precious metals consultancy GFMS chairperson Philip Klapwijk says that investors have been buying gold as a hedge against inflation and in expectation that the metal’s price will continue to rise.

But he cautions that the big role that investment demand for the metal has been playing, may leave the market vulnerable to a significant correction when investors start looking elsewhere.

“The honeymoon will not last forever. At some point, the scenario does change and then the investment case for gold becomes less appealing.

“The market has become a bit of a junkie, and is increasingly becoming more dependent on bigger and bigger fixes of inflow from the investor community,” he comments.

Nonetheless, GFMS still expects investment demand to grow through 2010, owing to inflationary expectations, a questionable dollar, increased inflow of new money from institutions like insurance companies and pension funds and with sovereign wealth funds becoming more active.

An alternative opinion was also given to Mining Weekly by a gold analyst wishing to remain anonymous. He says that one may see demand for physical gold starting to fall off in 2010: “In the beginning of 2009, demand for physical gold was very high and tailed off a bit in the second half of the year. I expect this trend may be similar going into 2010. Also, I expect the new platinum- and palladium-backed ETFs launched in the US possibly to offer a challenge to the gold sector when it comes to investment,” he adds.

The launch of platinum- and palladium-backed ETFs on the New York market has given US investors their first opportunity to invest in the physical metals.

These novel investment vehicles are seen as a precursor to a wave of investment buying in anticipation of a recovery in industrial demand.

Swedish research group Raw Materials Group (RMG) states in its yearly forecast that the three key factors driving the price “are now history”.

“The fall of the dollar looks to be over for now, the move to more secure investments during the financial crisis has come to a halt as a result of the return of risk appetite, and the falling output of gold mines in 2009 has been reversed for the first year since 2001.”

However, increasing interest from China and India in gold investments and the “haunting spectre” of inflation following government stimulus packages could keep prices for the yellow metal high.

SPARKE IN THE DRAGON'S EYE

Looking eastwards, physical gold is considered one of the most valuable assets in the world, with gold bars, coins and jewellery being the hottest buying propositions in larger gold consuming countries like India, China and a number of Middle Eastern nations.

Reid points out, however, that the soaring gold prices have placed a bit of a damper on India’s gold consumption, although the country’s demand is still massive and, even accounting for the recession period, India still takes up about 700 t to 800 t of gold a year.

A number of analysts feel that India has already relinquished its spot as the top gold importer in the world, and that China may have overtaken the country in imports of the yellow metal for the 2009 year. Reid says that the main deterrent in the Indian market has been the soaring gold price, even though gold will always remain an investment in India. “What changes with higher gold prices is the source of gold. With a higher gold price, a greater supply of scrap gold becomes available on the market.”

Interestingly, what acts as a deterrent in the Indian market is the very force that drives the Chinese market. The massive rise in the gold price in 2009 is the main reason for the Chinese craze for gold buying these days. With the gold price gaining 50% in 2009, from $801/oz in January 2009, to $1 226/oz in December 2009, Chinese investors seem to be hooked on bullish forecasts, predicting that gold prices could rocket up to $2 000/oz by the end of the year.

Demby says that the Chinese have a long history of buying and owning gold. “Keep in mind that the dynamics of the global economy have changed significantly. Fifty years ago, the Chinese did not have large amounts of money to invest. Today, they have cash and holdings of well over a trillion dollars, and if they invest 10% of that in gold, it adds up to a billion-dollar investment.

“Last year, the gold price started off at about $750/oz and by the end of the year, it stood at over $1 200/oz. Personally, I think that the prediction of gold reaching $2 000/oz in a couple of years is not as extreme as it was a couple of years ago.”

GOLD PRICE OUTLOOK 2010

Nonetheless, a number of sources have indicated to Mining Weekly that the gold price may have reached something of an equilibrium. Reid says that the current gold price will probably hover around $1 200/oz for quite a while.

“Personally, I am not too bullish about the gold price going too much higher than current levels. Big movements in the gold price, either up or down, are fairly unlikely. Most investors have increased their percentage of gold in their portfolios and, even though it is only a small increase, it has had a big effect on the price of gold.”

Even so, he predicts that demand for the yellow metal is likely to stay and envisages that a slight rise to about $1 300/oz to $1 400/oz is not impossible.

An industry analyst wishing to remain anonymous agrees with Reid, stating that, in the short term, he expects demand for gold to hold, and does not expect the investment drive into physical gold to pick up substantially.

“The bank expects current levels will be maintained in the short term, mainly supported by the weak dollar and infla- tionary concerns. We haven’t seen inflation pick up yet, but investors are keeping this at the back of their minds. Investment into gold will act as a store of value while confidence in global currencies is still quite weak.

“However, in the longer term, the bank is much more bearish on gold,” he comments.

He expects the current gold price of just over $1 100/oz to be maintained and predicts an average gold price of about $1 150/oz for 2010.

London-based TheBullionDesk.com director Ross Norman envisages that the spot gold price will average $1 236/oz in 2010, which is up 27% on the 2009 average of $972. He says that continued strong investment demand would more than offset lower jewellery sales.

Further, Norman forecasts firm yet volatile prices for gold in 2010. “We are concerned that the massive government stimulus packages through quantitative easing measures, paid for with borrowed and printed money, are having only a relatively modest impact on growth as bank balance sheets may take longer to repair than widely expected. We predict that this will give rise to continuing uncertainty on the tenure and outcome of these actions,” he says.

As a result, the company foresees increased interest in gold from the investment community with faith in fiat currencies undermined; this should ensure that investment demand not only fills the gap from diminished jewellery sales as prices rise, but should also lead to a significant increase in total gold demand.

Klapwijk says that the price of gold is likely to rise above 2009’s record of $1 226/oz this year, and could even climb to about $1 300/oz if the global economic recovery proves sufficiently sluggish and new investment money continues to enter the market.

ON THE SUPPLY SIDE

Meanwhile, Norman says that supply is likely to remain constrained as few new projects come on stream to replace ounces taken out of the market by ETFs and other investment vehicles.

GFMS reports that gold mine production rose 6% in 2009, to 2 553 t, after three con- secutive years of decline. However, the com- pany predicts that the decline is likely to resume in 2011 and onwards.