Another Year of Double-Digit Growth in Gold Prices?

St. LOUIS (ResourceInvestor.com) -- It’s nearly three weeks into 2008, and gold has already experienced some intense ups and downs. Resource Investor talks with GFMS’ Philip Klapwijk about the firm’s Gold Survey 2007 - Update 2.

RESOURCE INVESTOR: Hi, this is Jane Louis with Resource Investor Podcasts. Precious metals consultancy GFMS released the latest edition of its Gold Survey 2007 this week - just in time for the gold market to see a huge sell-off, sending prices back below $900. I’m here today with Philip Klapwijk, executive chairman of GFMS, to talk about what’s going on in the gold market and what’s to come. Hi, Philip. Welcome again to Resource Investor.

PHILIP KLAPWIJK: Thank you for having me.

RESOURCE INVESTOR: So you predicted in the Gold Survey that the gold price wasn’t sustainable above $900 in the short term, and here we are watching gold tumble more than $20 yesterday to $882. I don’t think you could’ve picked a better time to release your survey.

PHILIP KLAPWIJK: Well, you’re right, but on the other hand there’s such market volatility, you get out there and make price forecasts and you can very quickly get egg on your face. I’ve been lucky lately.

RESOURCE INVESTOR: So what factors told you that gold was going to take a hit in the short term?

PHILIP KLAPWIJK: Well, I think it’s the classic case of too far, too fast. We saw a lot of momentum money coming into the gold market built up in speculative, short-term positions, long positions that we felt as some point had to come down. And the market basically couldn’t correct and take a breather before moving upwards again, based its, let’s say, stronger hand.

RESOURCE INVESTOR: All right. Well, moving to the survey, you say that investor demand really picked up in the second half of 2007 due to the subprime credit crunch. Do you expect this trend to stay true through 2008?

PHILIP KLAPWIJK: Absolutely. I think this has been a really big change in the mood music, I think, for the gold market and that is the credit market crisis, which is by no means behind us. It almost seems that daily we’re seeing new revelations as to the size of bank losses in these markets, and this is spooking a lot of investors. It’s been certainly very good product for gold prices and for gold investment demand.

RESOURCE INVESTOR: One of the factors that could impact the gold price is the Federal Reserve’s monetary policy. A lot of analysts are calling for another rate cut at the end of January. Do you think the gold price has already factored in that rate cut, or can we see more gains?

PHILIP KLAPWIJK: I think 50 basis points seems to have been factored in, but we will see further rate cuts in my view during the course of 2008, and this will be highly supportive of gold prices going forward. We’re in fact going to move, I think, into territory of negative real interest rates in the United States due to the difficult choice that the Fed has between recession on the one hand and inflation on the other, and also the requirement to try and keep the financial system operating in a healthy manner. They’re going to be forced to cut rates in spite of worrying levels of inflation, inflation at close to 4% of the standard measure. And this negative real interest rate down I think we’ll enter into this year is going to be very powerfully positive for gold.

RESOURCE INVESTOR: If we do see a negative interest rate, how far do you think that will send the dollar down?

PHILIP KLAPWIJK: Well, I think this will send the dollar down another leg or so. We’ve seen the dollar’s range ratchet up again against the euro, against other stronger currencies like the Chinese Yuan and of course the steady significant unwinding already of the yen carry trade. I think basis the euro, it’s by no means inconceivable that this year we see prices to better euro move up into the 150s. And that could be good enough to send gold significantly up, perhaps towards the $1,000 mark.

RESOURCE INVESTOR: Okay. Turning to jewellery fabrication, in the survey GFMS says jewellery demand was significantly down in the last six months of 2007 and a further drop is likely. Won’t this lack of demand start to drag down the gold price?

PHILIP KLAPWIJK: Well, this is going to provide, I think, a ­­­fairly powerful headwind to the gold price if we do see as we’re predicting. For example, jewellery demand could come off some 20% in the first half of this year on a year-on-year basis. This demand is going to have to be picked up from somewhere else. We do feel though that investment demand will come up to the plate and that we will see investment demand substituting for lower jewellery and also I should add, a lower rate of de-hedging.

RESOURCE INVESTOR: India is especially sensitive to price volatility. Is there anything in your opinion that can be done to boost jewellery demand there?

PHILIP KLAPWIJK: Well, this is a market which is notoriously volatile in terms of its demand. If you look at our numbers, for example, for Indian demand in 2007, you’ll note the massive difference between demand in the first half and the second half, but the second-half story was very much one of demand being crushed by rupee gold prices starting to appreciate quite significantly, and that’s accompanied by very high levels of price volatility. And it’s these things going forward - volatility being at high levels at high absolute prices, which are starting to really constrain consumers’ ability to buy jewellery - that will, I think, send jewellery demand lower even in these countries which have been pretty solid to date for jewellery demand.

RESOURCE INVESTOR: Okay. Moving to central bank sales, GFMS says not to expect an increase in official sector sales in 2008. Why not?

PHILIP KLAPWIJK: Well, what we saw in 2007 was a return, if you like, to normal levels of sales from the central bank gold agreement countries. They in fact sold a little above 500 tonnes for the calendar year, essentially for filling the crater for the agreement here. We think that this year it’s more likely that we see a slight decline in selling, therefore, from the central bank sector as a whole because we are starting from a base, if you like, where the Europeans already are meeting quota in 2007 - something we think may not be repeated in 2008. And if that is the case, then we also have a little bit of buying as we did last year for the rest of the world on an aggregate basis, that suggests that central bank sales overall are more likely to go down a bit than stay steady or certainly rise.

RESOURCE INVESTOR: Okay. Finally, Philip, and I know I ask you this every time we talk, but where do you see the gold price headed in the next year?

PHILIP KLAPWIJK: Well, our view is that we’re going to see prices trend upwards, but yes, we’re on, or perhaps we’re in the middle now, of a correction - a much needed, I think, correction in the market, which will take prices down perhaps below $850. I think though that we are still very much in a bull market and that gold prices will continue to trend upwards later this year with possibly hitting the $1,000 level on the upside. And in terms of averages we’ve been looking this year at something around about $866 for the calendar year 2008, which would represent another year of double-digit growth in gold prices.

RESOURCE INVESTOR: Great. Thanks for your time, Philip. This has been Jane Louis talking with Philip Klapwijk on Resource Investor Podcasts.