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Gold Long-Term Case Builds on Inflation and U.S. Dollar Fears

Commodities / Gold & Silver 2009 Sep 15, 2009 - 07:56 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD held in a tight range just below $1,000 an ounce in Asian and early London trade on Tuesday, while global equities, bonds and raw materials also held flat.

Only the British Pound moved sharply on the forex market, falling to a 5-session low vs. the Dollar on stronger-than-expected UK inflation data.



New data showed producer input prices in the United States rising almost twice as fast as analysts predicted in August, up 1.7% from July.

"Given the inflated [speculative] positions for the precious metals," says one London dealer in a note, "it is difficult to see where the next impetus will come from."

"Investors are very long," agrees MKS Finance in Switzerland, "and Gold will have to further consolidate before attempting another assault higher."

But "The short-term Gold technical picture remains bullish while the $990 level holds," says Scotia Mocatta, the bullion bank.

"We will need multiple down days to shake the bullish sentiment."

Speaking at the annual Gold Forum in Denver, Colorado yesterday, head of the CPM commodities research group Jeffrey Christian noted that "We are now into the ninth year of the current bull market in gold. We have had more investors buying more gold for a longer period of time than ever before.

"They probably will continue to buy even if the economy stabilizes."

Current prices need investors to buy 60-70% of world mine production according to Paul Walker of London-based GFMS, thanks to the global drop in jewelry and industrial demand.

"Is that sustainable indefinitely?" Walker asked. "I don't know."

GFMS's latest updates to its Gold Survey 2009 – launched here in London on Monday – predict a 19% drop in world jewelry demand this year. Overall Gold Investment demand is set to show growth of 478%.

"I think the downside in Gold is limited to 5-10%," said GFMS chairman Philip Klapwijk in Q&A following his presentation. "Whereas we could see other commodities dropping perhaps 30% on a setback."

Noting the huge Jump in Gold Derivatives Bets, "Speculators are rebuilding their positions" after the dramatic halving of open interest in 2008. "That's not to say we can't see a correction from current 'frothy' levels...but [that would] set us up for renewed gains to new record prices."

Looking at scrap-metal supply – spurred by record-high prices across India and south-east Asia, as well as new gold buying operations such as Cash4Gold in the West – the "supply shock" of early 2009 has not yet returned despite higher Dollar Gold Prices, Klapwijk reported, while central banks are now "net purchasers" after acting as "heavy, price-insensitive sellers" every year since 1989.

Jeffrey Christian of CPM Group told the Denver Gold Forum on Monday that central-bank demand will now equal 185-310 tonnes of gold per year – and "that is an extremely conservative projection."

But "We must be aware that the bull market will not last forever," Klapwijk said in concluding Monday's GFMS presentation here in London, highlighting "two warning shots" in the consultancy's long-term global analysis.

First, annual net demand – meaning all gold-product fabrication minus old-scrap supply – has been lagging annual mining output since 2001, creating a surplus this year of some 1,500 tonnes.

Second, and after annual jewelry fabrication first turned lower in 1997, the volume of physical Gold Investment is now close to overtaking it.

For the time being, however, GFMS believes sheer "weight of money" makes a strong case for Gold Investment, firstly because global allocations as a proportion of portfolios remain low; real interest rates after accounting for inflation are low to negative, making the on-going costs of gold storage less onerous; and fears over inflation and the fate of the US Dollar "will only grow" over the coming six months or more.

"Anybody that's long a lot of US Dollars – China being one, maybe the Middle East – they're going to go: 'This thing is going downhill fast'," forecast Gold Mining entrepreneur Rob McEwen, former chief of GoldCorp and current CEO of both US Gold and Minera Andes Inc., at the Denver Gold Forum yesterday.

"[They're going to think] 'We have to get out of it and we're going to buy assets'."

Ending his presentation with a lottery to win a mock $1 trillion bill, reports Dorothy Kirsch at MineWeb today, McEwen named a Gold Price of $5,000 an ounce by 2015.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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