GFMS Sees Gold Demand Falling Before Prices Resume Drop in 2014

Gold demand will fall in the second half as bar buying slips from a record and central banks add less to reserves, while prices may climb toward $1,500 an ounce by early next year before dropping, Thomson Reuters GFMS said.

Total demand will slide to 2,237 metric tons this half from 2,309 tons a year earlier and 2,533 tons in the first six months of 2013, the London-based researcher said today in a report. Jewelry demand that reached a six-year high in the first half on record buying in China will ease in the six months through December, it said.

Bullion rallied 15 percent from a 34-month low in June as lower prices boosted demand for jewelry, bars and coins in India and China. India’s government increased gold-import restrictions this year to combat a record current-account deficit. The metal is set for the first annual drop in 13 years as some investors lost faith in gold and on speculation an improving economy will prompt the Federal Reserve to begin curbing stimulus.

“Although an improving outlook for the U.S. economy has raised the probability that the Fed will start to scale back its stimuli after its September meeting, the majority of the negative factors have already been priced in,” GFMS said. “Demand in India is forecast to be some way short of the elevated level in the second quarter. Turning to China, the prospect for local demand is more promising, but growth is expected to cool down.”

Price Forecast

Gold for immediate delivery slid 19 percent this year to $1,362.36 an ounce by 4:32 p.m. in London yesterday. It rebounded from $1,180.50 in June. Prices could reach as high as $1,526 in the first quarter if the Fed delays stimulus cuts and will average $1,350 next year, GFMS said. Gold set a record $1,921.15 in September 2011.

Holdings in bullion-backed exchange-traded products dropped 26 percent this year, wiping $56.4 billion from the value of the funds, data compiled by Bloomberg show. Assets gained 1.7 tons since reaching a three-year low of 1,946.9 tons on Aug. 8. Fed policy makers will cut monthly debt purchases by $10 billion at the Sept. 17-18 meeting, a Sept. 6 Bloomberg News survey showed.

Jewelry usage jumped 23 percent to 1,137 tons in the first half from a year earlier, the most since 2007, as demand in China surged 41 percent to a record 345 tons, GFMS said. The global figure will total 1,000 tons this half. Bar purchases rose 52 percent to 725 tons in the first half and will ease to 441 tons in the six months through December, it said.

Central Banks

Central banks added 191 tons to reserves in the first half, 32 percent less than a year earlier, and buying will slow to 170 tons in the second half, GFMS predicts. That would take full-year additions to 361 tons, above the London-based World Gold Council’s forecast of as much as 350 tons.

Scrap supply fell 14 percent to 662 tons in the first half, the researcher said. While that will gain to 736 tons this half, it will be 10 percent less than a year earlier. Mine production will be little changed from a year earlier at 1,501 tons this half, compared with 1,416 tons in the first six months, said GFMS, which was once owned by bullion producer Gold Fields of South Africa Ltd.

Mining companies reduced gold hedges by 26 tons in the first six months and will cut another 14 tons from forward sales in this half, 54 percent less than a year earlier, GFMS said. Producers’ average total cash costs increased 7 percent to a record $782 an ounce in the first half, while all-in production costs climbed to $1,250 an ounce, the researcher said. Prices traded below that level in June and July.

“We have only seen a modest number of producers elect to cease operations,” Rhona O’Connell, head of metals research and forecasting at the company, said in an accompanying statement. “With the recent price recovery, we expect this to remain the case in the short to medium term, limited to smaller, cash-strapped producers at the top end of the cost curve.”

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To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.

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