Gold May Rise to $1,300 an Ounce Fueled by Investment Demand, GFMS Says

By Madelene Pearson - Aug 28, 2010 3:47 AM GMT+0500

Gold, headed for a 10th annual gain, may reach at least $1,300 an ounce this year as investors seek a shield against financial turmoil, weak currencies and inflation, according to GFMS Ltd.

“There is going to be in all likelihood a surge in investment demand toward the end of this year, driving prices toward the $1,300 level and possibly beyond,” Chief Executive Officer Paul Walker said in an interview, repeating a June forecast. “Prices are going to ratchet up.”

Bullion demand increased 36 percent in the second quarter as investors boosted purchases of gold-backed funds and pushed up prices to a record during Europe’s sovereign-debt crisis, the World Gold Council said Aug. 25. Investors bought 291.3 metric tons of the metal in exchange-traded funds, or ETFS, the second- highest quarter on record, the producer-funded group said.

“There is a wide enough group of people who are going to continue buying gold for a variety of reasons and that’s going to be the key driver of price action,” Walker said from Goa, India, where he spoke at a conference yesterday. “The physical market, the jewelry market, will be playing a somewhat minor supportive role in price determination going forward.”

Goldman Sachs Group Inc. forecast earlier this month that prices may reach $1,300 in six months and Deutsche Bank AG said June 3 that the metal may surge to $1,700 as currencies slump. The euro fell to a four-year low versus the dollar in June.

Immediate-delivery bullion traded in London added as much as 0.4 percent to $1,242.35 an ounce and traded at 1,233.80 at 7:38 p.m. Mumbai time yesterday.

U.S. Recession

Prices have rallied 13 percent this year in New York and reached a record $1,266.50 on June 21 as investors sought to protect their wealth against financial woes in Europe and the prospect of slowing economic growth. Nouriel Roubini, the New York University economist who predicted the global financial crisis, said Aug. 25 U.S. expansion will be “well below” 1 percent in the third quarter and put the odds of a renewed recession at 40 percent.

“There are still uncertainties looming in the global economy and that’s continuously driving demand for gold,” Kunal Shah, head of commodities research at Nirmal Bang Commodities Pvt., said at the Goa conference. “The risk premium which are there right now in the market can take gold to $1,300. It has the potential to break its all-time high.”

Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, were unchanged at 1,297.95 tons as of Aug. 26, figures on the company’s website showed. Holdings reached a record of 1,320.44 tons in June.

‘Robust Demand’

In India, the biggest gold user, demand almost doubled in the first-half on increased jewelry purchases and investments, the council said Aug. 25. Imports by the country this year may equal 2009’s level as early as this month because of “robust” demand, the group forecast.

Purchases in the first half were 348 tons, compared with 559 tons in 2009, according to council’s data.

“This year we are seeing an underlying and somewhat remarkable theme in the Indian market; a willingness to continue to buy at high prices and a belief that the price will continue to go up,” Walker said. “You would have to have a pretty catastrophic final quarter of the year for imports not to match the 2009 level.”

Gold futures in India climbed to a record 19,198 rupees ($410) per 10 grams on June 8. Local prices have advanced 13 percent this year.

The price of silver may reach $20 an ounce as industrial demand rebounds, Walker said. The metal for immediate delivery was at $18.98 an ounce at 7:32 p.m. in Mumbai yesterday and has added 12 percent this year.

“The fundamental underpinnings of the silver market, fundamental industrial demand, has been incredibly strong this year to date,” said Walker. “The price trajectory is biased toward the upside.”

Silver doubles as a store of value for investors concerned about the economy and as a raw material. Industrial applications including electrical conductors and batteries account for about half of demand.

To contact the reporter on this story: Madelene Pearson in Mumbai on mpearson1@bloomberg.net