Paul Walker, of GFMS, the London-based metals consultancy, has said that investors must differentiate between what price gold can hit, and what can be sustainable.
While he believes gold can go higher due to expected investment fervor, he thinks that any price over $1,000 won’t be sustainable.
His belief is based on the deterioration of physical demand for gold used in jewelry.
He is also concerned by the fact that gold has rallied much stronger in dollar terms than in other currencies. For example, he cites that gold is 30% below its peak when priced in the South African rand. To him, the dollar story alone isn’t enough.
Commodity Online: “For it to be a sustained, justifiable bull rally, we should be seeing gold going up in every currency,” Walker said. “It’s just about the dollar. Investments in gold are not just those investing in dollars … a point indicating this is not a genuine bull rally.” Scrap volumes exceeded total fabrication demand in the first quarter of this year, another worrying sign as jewellery demand performed extremely poorly in the first half of the year.
India, the world’s largest consumer of bullion, holds the key to the outlook for demand and how high and sustained gold prices will be in the next 6-18 months, he said.” We are starting to see stresses and strains in what consumers are willing to spend. The volume argument is starting to move against gold,” Walker said.”
Chinese retail investors are also already herding into gold, scared about Chinese domestic inflation just as Americans may be scared about dollar devaluation and inflation in the U.S., frequently using substantial leverage in the process.
For long-term gold investors who feel threatened by any words of caution, Jon Nadler put it well in the above Commodity Online piece when he said:
There are plenty of legitimate reasons for investors to buy gold. It is a hedge against inflation, and the ultimate store of value. But gold is just as prone to speculative bubbles as other asset classes — particularly if investors are leveraging their bets. China’s bullish retail investors are another reason investors should be wary about the latest gold price surge.”
Anyhow, for those unwilling to worry, enjoy the gains. Gold producers are talking up the metal as support, with South Africa’s Gold Fields most recently forecasting the metal to hit $1,600. That’s a great forecast for his business.