GFMS CEO Walker says gold could dip in 2 years (Source: Mineweb)

GFMS CEO Paul Walker says there is still plenty of upside in gold over the next two years, but demand could turn when the US economy improves.

Author: By Tessa Kruger
Posted: Monday , 04 Feb 2008

JOHANNESBURG -

There is still upside in the gold price over the next two years, but the current bull phase will end in the medium term, says GFMS.

GFMS CEO Paul Walker said Monday at the Mining Indaba in Cape Town that gold price movements were not only a function of the US dollar, but the yellow metal had its own dynamics of macro supply and demand factors.

He said the surge in the gold price as was not only a "dollar story" as the metal has rallied in every economic currency, including the yen and the Euro. Although the dollar was an important factor in the gold price, the surge across currencies suggested that "something else" was driving the metal higher.

The key factor driving gold investor demand was imbalances in the US economy, such as the subprime crises, that changed investor attitude towards gold.

Walker said if a recession in the United States did take place, the commodity complex as a whole could see weaker prices, but gold and probably platinum group metals would "decouple" to sustain high prices. "Our view is that the US will go into recession and that it will have knock-on effects of one to two percent of lower growth in India and China. This would in turn have knock-on effects on big commodity prices."

However, this occurrence would at the same time make the case for gold stronger.

Gold mines will increase production in 2008, expect perhaps in South Africa, but net official sector sales remain flat since 2000, while scrap recycling and de-hedging has increased.

World Gold demand in 2007 comprised of jewellery (63%), de-hedging (11%), investment demand (12%) and other fabrication demand (14%). "The demand story is to really keep your eye on the role of jewellery. Jewellery's responsiveness to lower and higher prices is important."

Walker said that jewellery demand was the key to the floor price that would not fall below the $800/ounce, $820/ounce or $830/ounce level. "Investment flows into gold have not been high and one asks oneself what could happen if the attitude towards investing in the commodity complex changes."

"There may be growth in future production and higher recycling of scrap that will boost supply. Fabrication demand will fall sharply, but investor demand will by far compensate for lost fabrication demand and lower de-hedging."

Walker said the gold rally could potentially end if the gold investment drive weakens on the back of a better US economy.

Gold had plenty upside still in 2008 and 2009, but the picture could change in two years when the US economy improves and demand for the metal turns.