The problem as GFMS sees it is that the current gold rally is being
supported almost entirely by investment demand rather than jewellery
demand. With continuing bad news out of the U.S. and growing global
inflation concerns, investment should continue to drive the gold price
in the near-term — the consultancy thinks a price of US$1,100 or
higher is achievable this year.
But once U.S. interest rates head
upward again and the economic picture improves, Mr. Meader said that
"the whole basket of drivers we've seen supporting the price will
Unlike the outspoken "gold bugs" who predict that the
global monetary system as we know it will collapse, GFMS does expect
the situation to get better. And that means investment demand will
eventually decline and jewellery demand will need to pick up the slack.
The consultancy figures the growing gap between mine production and
jewellery demand means prices have to come down.
Ed Bugos, editor of Gold and Options Trader, says there's a reason GFMS pooh-poohs investment demand.
It represents the gold
mining industry and tries to distance itself from "gold bugs" per se. Its
valuation of gold is based on the idea that the jewelry industry determines it.
It sees investment demand as an unsustainable speculative
GFMS has never
genuinely criticized the monetary schemes of central banks, the concept of
fractional reserve banking or the entrenching global inflationism. Why would
it? In reality, if it represents a coalition of gold producers it does not want
inflation to stop. Gold production would be a boring business if the value of
fiat money weren't constantly falling.
GFMS expects the
economic situation to improve and for investment demand in gold to decline as a
result. But its analysis of the economic situation is conventional, and
discounts the magnitude of the inflationary cycle, and its implications for
gold, because it literally works with gold producers and central banks, and
can't criticize either.
It simply does not
speak for investment demand.
It is not telling
investors they should own gold to protect themselves from the ultimate effects
of the unprecedented world-wide manipulation of money and interest. It can't.
But certainly there is no sign of a stoppage in those
The degree of
"speculative" buying in gold has been tamed by frequent corrections so far, and
lingering fears of central bank selling. We are seeing confidence return to
gold, not exuberance. Investment demand will continue to grow; it is the
fundamental driver of this bull market, not a speculative one. The transfer of
gold from the central banks and governments to public hands is bullish for the
structure of the market. The fundamentals that are driving investment demand
today are rooted in the mistakes of central banking and the world's increasing
infatuation with inflationism.
GFMS is out of touch
with the fundamentals that drive demand and gold values… yet its basic model for
gold prices is not that different from mine in the medium
Of course, my call is
more bullish, and I don't expect investment demand to fundamentally disappear in
the subsequent correction. The inevitable deep correction will represent simply
the higher volatility that comes into the gold market, but which has only just
begun to arrive. A correction from $1100 would bottom out at $750 today based
on a normal volatility analysis. It remains to be seen if gold tops out at
$1100 or $1600, or whether it has already topped
But the only way gold
would fall to $600 from $1100 or lower is on a speculative (irrational)
Anything is possible,
but that price wouldn't last a week.
Yet, the timing of
GFMS's call is revealing. It comes at a time when the central banks typically
pound gold, and is buried within a half-hearted bullish short term call, which
is more like a hedge. And it comes just when the news of the IMF's approval for
selling some of its gold failed to push the market