30 March 2011, 07:47 a.m.
By Allen Sykora and Daniela Cambone
Of Kitco News
http://www.kitco.com/
(Kitco News)Investors added 33.8 million ounces of gold to their holdings in 2010, enabling the metal to post record-high average prices, and a secular bull market is likely to run for another decade, CPM Group said Tuesday.
Nevertheless, pauses occur in bull markets and one may lie ahead for gold, Managing Director Jeffrey Christian cautioned during a presentation in conjunction with the release of the consultancy’s Gold Yearbook 2011.
CPM Group has been bullish on gold since November 2000, Christian said.
“The price of gold has been driven up sharply by investors who have been buying gold because they are concerned about economic, financial and political concerns,” he said. But there can be a “cyclical pause” in long-running markets when investment interest abates for a while, he said.
“Our view right now about gold is that we may be approaching a cyclical peak in a secular bull market,” Christian said. Investors are “going to remain interested in gold…for the foreseeable future,” which he defined as the next 10 years.
“But within that context, there is some backing off,” he said. “And that backing off could lead to a period of gold-price weakness that could extend for a couple of years…We think that the gold price could back off to $1,200 or maybe even $1,160 an ounce.”
He foresees a scenario in which investors may curtail their purchases, rather than outright selling, perhaps starting in the second or third quarters, if investor concerns about financial problems and the economy abate. Such price declines have occurred before, he said, pointing to the correction from around $1,030 in 2008 to around $780 in early 2009. “And then it turned around and made a new high within 12 months,” Christian said.
By around 2014, Christian said, he looks for gold to exceed whatever record highs are hit this year. He looks for investors to buy at least 20-25 million ounces of gold annually for the next decade.
An audience member asked Christian when he thought gold would flip to a secular bear market, and the CPM Group official listed a number of conditions that suggest this may not be any time soon.
“I think you will have to have a balanced budget in the United States,” he said. “You’d have to have a government that was reputable and credible. You’d have to have the European Union look like they could manage their own finances…(and) a reduction of tensions in the Middle East, and a reduction of inflation in China—or some mix of those.”
The 33.8 million ounces of new gold investment last year was a jump of 23.7% from 27.3 million ounces added in 2009, CPM Group reported. This enabled prices to average a record $1,228.03 an ounce, up 26% from 2009.
Investors remained net buyers of gold for its safe-haven and portfolio-diversification qualities, using it as a hedge against inflation and currency market volatility, CPM Group said. The emergence of new investment avenues in recent years has also contributed to the rise in investment demand, said the New York commodities research firm.
Gold backing ETFs increased to 70.5 million ounces by the end of 2010, up 11.3 million ounces from the previous year. Last year, this represented roughly one-third of physical-investment demand for gold, Christian said. Gold is put into storage to back ETF shares that trade like a stock but track the price of the commodity.
Trading volumes on gold futures and options markets increased 20.9% in 2010 to 6.4 billion ounces, CPM Group said. “Many exchanges that offer gold futures have begun to offer smaller-sized contracts, making it easier for smaller investors to enter the gold futures market,” CPM Group said.
Official Sector Expected To Add To Gold Holdings Again in 2011
Official-sector gold holdings rose 10.22 million ounces in 2010, the report said.
This would have been the second straight year of net additions, but became the third straight year since Saudi Arabia announced last summer that it had acquired 5.78 million ounces in 2008, said Carlos Sanchez, director of risk management with CPM Group.
The biggest additions to reserves in recent years were from the central banks of China, Russia and India, plus the Bank For International Settlements, he said.
“This year, we expect the official sector to accumulate between 8 (million) to 12 million ounces of gold,” Sanchez said. “Most of these additions are likely to come from developing economies.”
These countries have bought gold to offset their exposure to foreign currencies, CPM Group said. Industrialized countries, which mostly were sellers of gold over the past few decades, have been reducing their gold sales and even increasing purchases in recent years, said the report.
Mine Production Rises But Secondary Recovery Lower In 2011
Total gold supply rose to 120.8 million ounces in 2010, up a modest 0.3% from 2009 said CPM Group, with the increase coming entirely from newly refined mine supply. Mine production of gold increased for the third year in a row, to total 67.6 million ounces, while secondary recovery of gold declined 2.1% in 2010 to 42.2 million ounces.
This secondary recovery was curtailed as people, particularly in developing economies, held onto their gold in anticipation of still-higher prices and also for a hedge against inflation, said Erica Rannestad, commodity analyst with CPM Group. In previous years, secondary recovery increased with prices, before abating as gold topped $1,000.
Meanwhile, mine supply is to forecast to rise 6.9% this year, Rannestad said. Further increases are expected over the next half decade.
“Mine production responds strongly to the price of the underlying metal,” she said.
Strong prices in the early 1980s encouraged producers to expand during this decade, before weaker prices in the 1990s meant producers were not developing new mines, Rannestad said. Against a backdrop of rising gold prices, companies expanded exploration and development spending again in the past decade.
Ore grades have declined since the 1970s, she said. Some of this is because new technology enables companies to mine grades that were not profitable at one time.
Gold-Fabrication Demand Rises Slightly In 2010
Christian characterized fabrication demand last year as “largely flat,” although the report said it nevertheless rose for the first time in two years. It was pegged at 76.8 million ounces in 2010, up 0.6% from 76.3 million ounces the previous year.
The 4.3% increase in industrial demand for gold was entirely offset by the slight decline in fabrication demand from the jewelry sector. Jewelry fell 0.3% to 60.8 million ounces in 2010.
China’s Gold Output Not Keeping Pace With Country’s Demand
Fabrication demand in the China—primarily jewelry--has been rising some 7% to 10% annually in recent years and is now close to 14 million ounces, Christian said. Investment demand is also rising and was pegged at 3.7 million ounces in 2009, around 5.5 million in 2010 and could be 7 million or more this year.
The country in recent years surpassed South Africa as the world’s largest producer of gold, and China’s gold output is still growing, CPM Group said.
“Gold supply basically is in excess of fabrication demand, but is not adequate to meet that and investment demand,” Christian said.
CPM Group produces annual yearbooks on gold, silver, and platinum group metals, in a series of reports that began in 1971.The report provides detailed statistics on trends in each sector of the gold market in 2010, with insights into developments for this year.