On the face of it, the outlook for those who are investing in gold this year is good.
Gold Price Forecast
The consultancy reckons that gold will again hit new record highs in 2019. It forecast in a report on January 13 that the price of gold would be $1,175 on average this year. That is quite a lot higher than it was last year at $972 an ounce on average. Its main reason for optimism is that investment demand for gold will probably be strong because of fears of a double dip recession, higher inflation and a weaker dollar. These reasons are often the traditional ones for owning bullion and played a big part in it rising to a record price last year.
Investment purchases of gold (much of it going into dedicated ETFs) doubled last year, according to GFMS, with demand rising to 1,820 tons. It was apparently the first time in three decades that investment demand for the precious metal was greater than the amount of bullion bought for jewellery.
This gives me some worries about the sustainability of the current gold price and think that there are worrying signs that it is becoming a bubble.
Weak demand
My worry, which I've written about in previous posts, is that the high price of gold is driving down demand for jewellery, which is traditionally its biggest use. The great thing about jewellery purchases is that they are sticky. You'd have to be really desperate to melt down your wedding ring, for instance. And if you can afford to keep grandma's rings for their sentimental value then you'll do that to. Although some gold jewellery gets recycled, a lot of it stays on fingers and wrists and dangled from pretty ears. That changes the higher the gold price gets. Not only is less of the metal bought, but more may find its way back onto the market.
Investment demand, on the other hand, is notoriously fickle. Especially when it goes into liquid instruments such as Gold Exchange Traded Funds (ETFs). All of those tons that went into investment flows last year can come back within in twinkling of an eye. So long-term investors in gold should really be looking closely at jewellery demand.
Even GFMS seems a little worried. In an article in the Financial Times, the FT quoted Philip Klapwijk, the executive chairman of GFMS, as saying that he thought the market would become "increasingly vulnerable" to a big correction. According to the news report he said that:
"As the macroeconomic environment gradually normalises, the gold market's dependence on investment will become all too apparent with a substantial price retreat at that point on the cards."If that doesn't sound like a bubble warning, I'm not sure what does.
