GFMS's Philip Klapwijk maintains that gold investment demand will stay healthy through the course of 2012 on the back of continued loose monetary policy and worries about the US and europe

Author: Geoff Candy
Posted: Tuesday , 17 Apr 2012

ZURICH (MINEWEB) -

Investment demand for gold has grown consistently over the course of the yellow metal's bull run and, 2012 is likely to continue this trend.

This is the view of Philip Klapwijk, Global head of metals analysis at Thomson Reuters GFMS.

Speaking at the Denver Gold Group European Gold Forum, Klapwijk , supported his view by looking at a number of factors that will affect the level of investment demand into gold over the course of the year.

The first of these, is the performance of the gold price itself, not only in absolute terms but also relative to other assets.

According to Klapwijk, over the past decade or so, the yellow metal has done well compared to most other asset classes, outperforming bonds and equities and even the CRB index.

"It has really only been outperformed by copper and silver at times. And, year to date, silver and copper have shone more brightly but, gold has still done reasonably well."

But, he adds, if one looks back to the 1980s and adjusts for inflation, the gold price averaged $1,678 in today's money, which is fairly close to where the metal is trading now.

"This can be seen as a warning note if you are on the bearish side of the market," he said, but added, "for those on the bullish side of things, however, the high point that year was over $2,200, which is rather far away from current levels."

The second factor likely to play a role in determining the level of investment demand is the performance of the dollar.

Klapwijk believes that the US dollar is likely to have a somewhat stronger tone over the course of the year than it did in 2011 and this could be somewhat negative for gold investment.

But, he does point out that while there is a fairly strong correlation between dollar depreciation and higher gold prices, since the 2008 financial crisis, that relationship has not been constant.

"As a result of this breakdown and the fairly consistent rise in gold prices, I don't see the stronger dollar as too big a black mark for gold, as long as the advance in the dollar is a controlled one."

The third factor that has a bearing on gold investment is the monetary policy at work in the global economy.

Klapwijk said there is a debate happening at the moment as to whether or not we are likely to see a third round of quantitative easing in the US.

"If you look at US employment data, this is still a worrying level and it suggests to me that there is a disposition in the fed toward considering further monetary easing if these indices don't improve."

He added, "I think it is more likely the US could disappoint over the summer so there is a reasonable probability that we will see further stimulus ahead of the general election in November, which would be good for gold."

The eurozone is also likely to be supportive of gold prices as, Klapwijk points out, it is looking increasingly likely that the European Central Bank will have to step in to support the Spanish bond market.

"We are likely to see further monetary easing in Europe and this will provide stimulus for gold," he said.

Given this very loose monetary situation, both Europe and the US are faced with deeply negative real interest rates which is also likely to be a positive factor for gold.

But, he points out, If one looks at India, rates have actually climbed into positive territory over the last few months and this could well account for part of the weakness seen in that market in the first quarter.

The other debate that is raging within gold markets at the moment is, whether or not there is a massive weight of money sitting on the sidelines of the market at the moment or, if those investors that want gold now have enough.

On this point, Klapwijk provided both sides of the argument, saying, "If you look at the value of gold investment, gold remains a tiny portion of the overall markets so, theoretically there is a huge scope for investment demand but, one does have to ask the question, Why after 10 years of a bull market you havent seen more of these mainstream portfolio managers come into the markets?"

Nonetheless, Klapwijk remains positive on the prospects for investment demand, "I think we are going to see a loosening of monetary policy globally, continued crisis in the eurozone and negative real interest rates, inflation expectations rising and all of this will provide a pretty powerful stimulus for gold investment

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=149628&sn=Detail&pid=102055