Gold Investment to Prevail on Inflationary Fears - GFMS


". . .last year's investment flows into gold could be dwarfed by this year's."

The 2009 Gold Survey from GFMS Ltd says that it is only a question of time before gold investment demand is again strong enough to overcome the "not inconsiderable" obstacles presented by the weakened jewelry market and record levels of scrap supply. Both of these have been driven by high and volatile gold prices compounded by the negative impact of the global economic downturn on consumer spending. The easing of the immediate crisis in the financial system takes some of the momentum out of safe haven gold buying but this will be superseded by increasing worries over inflationary pressures as a result of governments' and central banks' fiscal and monetary policies.

GFMS' exhaustive analysis of the market flows produces a supply-demand balance that shows a 10% contraction in jewelry demand in 2008 to the lowest level since 1989. Gold demand overall fell by just 1.0% in 2008 as the surge in investment demand took up most of the slack generated by the falls in jewelry, fabrication and producer de-hedging. Total supply of mine production, official sector sales and old gold scrap came to 3,880 tonnes, while jewelry, industrial fabrication, bar hoarding and net producer dehedging came to 3,592 tonnes.

This leaves a net excess of 288 tonnes, but investment demand substantially outstripped this notional surplus. This year's survey identifies strong physical investment buying last year (other than coins and investment bars) in North America and, particularly, Europe. This amounted to 197 tonnes while there were net ETF inflows in 2008 were a record 321 tonnes, giving a total identified investment flow of 519 tonnes.

This suggests that 231 tonnes were teased out of other private hands or inventory adjustments and GFMS identifies a primary source of this material as the "forced" liquidations from institutional players as they raised liquidity during the financial turmoil of September and October. This gave rise to net disinvestment during the third quarter of the year while there was net investment in the first and fourth quarters.

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