Price of gold tipped to remain high

Tight supply, rising demand in India and increased central bank buying all factors but ore's safe-haven allure will eventually diminish

PUBLISHED : Wednesday, 14 November, 2012, 12:00am
UPDATED : Wednesday, 14 November, 2012, 2:58am


Gold prices will likely stay high next year as mine-supply is tipped to be restrained, demand is expected to pick up in India and the mainland and central bank buying will remain robust, according to the World Gold Council and Barclays.

But gold price is expected to be lower in a few years as its allure as a safe-haven asset diminishes with the global economy regaining stability, although it will still trade at relatively high levels due to supply constraints, say analysts at the British bank.

"We need to see a rise in investment demand to push gold price to record levels, five years out the trend is likely to be downward but prices will still be elevated in comparison to historical levels," said Barclays commodities research vice-president Suki Cooper.

Barclays' director of commodities, Jon Spall, said investors' interest in gold has been more subdued after the US government's recent third round of quantitative easing, or government bond buying, compared to previous rounds, since many who wanted to use gold to hedge inflation risks from the easing have already done so.

Over the long term, Cooper expected gold to fetch at least US$1,125 an ounce, the lowest price for miners to sustain production to cover cash production costs before accounting for fixed-assets depreciation. Barclays forecast gold to average US$1,810 this quarter, rising to US$1,860 next year. It fetched around US$1,725 yesterday.

Gold price has averaged US$1,718 an ounce this year, up 10 per cent from the same period last year.

World Gold Council managing director of investment Marcus Grubb said global bullion demand by tonnage may fall 5 to 10 per cent this year from last year.

The weakest link has been India, where demand fell 30 per cent year on year in the first half of the year, and may fall 20 to 25 per cent in the full year. The mainland, which may unseat India as the world's largest gold consumer this year, may see demand rise 3 to 4 per cent, Grubb said.

In February, the council's Far East managing director Albert Cheng Leung-ho tipped mainland demand to rise 18 per cent this year.

Grubb said given that recent mainland data seemed to suggest the economy is close to bottoming out from the downturn that began last year, gold demand is expected to pick up next year.

Anecdotal evidence of higher demand by some banks in India has also been observed, he added, citing research reports by Swiss bank UBS and Canada's Scotiabank issued last month.

Grubb said each dollar of exploration spent today yields only a tenth of the reserves 30 years ago, due to rising costs and greater discovery difficulty. The ore grade of discovery today is just half what it was 30 years ago.