Central Bank Gold Purchases Could Push Gold to New Highs—GFMS


". . .this time the weight of investment money. . .could well be sufficient to see prices vault the $1,000 barrier"

GFMS' newly released update to its authoritative annual Gold Survey suggests that, even if September's rally runs out of steam and presages a sizeable retracement, this will merely set the scene for a future, decisive, breach of $1,000. The force behind this next move will be predominantly investment, driven most probably by a renewed upsurge in inflationary expectations. This would likely accompany a dollar slide, though GFMS makes the valid point that if all currencies became suspect, then the move would not need to be driven by dollar weakness.

GFMS expects the official sector to be a net purchaser of gold in Q209, even if the proposed IMF sales of 403 tons are approved next month and start being sold into the market under the third Central Bank Gold Agreement (CBGA). The group notes that the provisional figure for net official sector sales in Q109 is the lowest half-year figure since H197, with the decline driven by a fall of more than 42% in sales under the CBGA. The forecast level of net sales for the year as a whole will be at a 20-year low and this reflects shifting sentiment in the official sector towards a variety of factors affecting foreign exchange reserve management.

This factor, along with stagnant mine production (despite its upward blip in the H109) is expected to contribute to a scenario that supports higher prices in the next few months, "although this may be preceded by a temporary but important dip in the price if the current move higher is not sustained." GFMS expects that this time the weight of investment money entering the market "could well be sufficient to see prices vault the $1,000 barrier," aided by the fact that scrap return should not be as weighty as it was in the first quarter of this year.

On the other side of the equation is what could be marked weakness in jewelry demand, but the supply-side features may "do much to offset" a slack jewelry market.

The supply-demand analysis in the study projects a healthy bounce in jewelry demand in the H209.

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