Gold Is the Canary in Coal Mine – GFMS CEO

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(Kitco News) -- Under current conditions, the year-end $1,600 gold price forecast by metals consultancy GFMS suddenly becomes a readily attainable goal, according to the company's chief executive officer.

"I use the analogy of gold as being the canary in the coal mine, it really is a fierce indicator that something is awry in the market - something is not working properly," Paul Walker, GFMS' CEO told Kitco News fresh off the heels of its Gold Survey 2011 release.

GFMS, one of the world's foremost metals consultancy firms, reiterated its bullish outlook on gold bullion due to a myriad of economic and political factors. Comex gold futures prices were trading higher Wednesday morning and hit another fresh all-time record high of $1,506.20.

Walker said that he has been bullish on gold since 2003 - but was still cautious observing the market, believing that  the central banks of the world and the fiscal authorities would take the necessary hard steps sooner rather than later to correct the imbalances.

"What shocked me  is the unwillingness of the central banks and fiscal authorities to tackle the problems. The British are one of the few that have taken a sharp knife to the fiscal side of things and cut into expenditure programs," Walker told Kitco News.

"Where we find ourselves now is the unbelievable situation where the IMF comes out and says, 'they don't believe that the US debt policy is credible or sustainable,' - it is just a mind-boggling state of affairs," he said.

The International Monetary Fund recently noted that the US economy "appears sufficiently strong" to withstand greater austerity measures and tax increases, adding that the benefit of last year's stimulus package "is likely to be low relative to its costs."

As long as a rising real interest rate environment doesn't occur, it is bullish for gold, noted Walker.

U.S. Federal Reserve Chairman Ben  Bernanke convenes his first press conference next week and is expected to emphasize he is serious about keeping interest rates low for an "extended period." Rather , some analysts had predicted higher interest rates in the U.S. by summer.

Walker said it is all a matter of degree. "If you take it from the current range of zero to 0.25, I look at this and say, that is just a laughable number," he said.  "For them to put up interest rates by 25 basis points is completely insufficient and will remain insufficient until monetary authorities send the right signals," said Walker.

"If you tell people that you have negative real interest rates then the incentive is either to spend and then you get to a state where people get worried about imbalances and move away from spending and put any spare cash into gold," Walker noted.

Indian demand

Despite the relentless rise in the gold price, the price sensitive market witnessed a phenomenal physical off take last year, said Walker.

"We had close to record levels of demand, levels that we last saw when the gold price was a fifth of what it is today in Indian rupee terms," said Walker.

The Indian factor was the most surprising element in 2010 for the CEO. The surge in Indian demand is an indication that the Indian market feels we are in for a long bull phase in the gold market, he said.

Mine Production

Walker was not surprised that mine production went up in 2010. World mine supply posted a solid gain in 2010 said GFMS, with every major producing region contributing to last year's higher total. GFMS noted this is the first time this has occurred since 1988. 

"Our view has always been that in a rising gold price environment, we have seen rising mine gold production," Walker said.

Walker said confusion may have taken place on the analytical and commentary side of the market.

"They don't have day to day details on this and were confusing declines in for example South African gold mine production - and thought that if South Africa was seeing a relentless decline in gold mine production and there is no major new mine coming on stream the logical conclusion was that mine production was going to fall," Walker said.

Rather, said Walker, with the rising gold prices the market has seen an uptake on exploration. "You have seen people re-start operations - there has been a huge grassroots increase in mine production globally and often outside of the traditional big producers," he said.

Mine production generally offers a relatively smooth gold flow into the market and in turn, no major price fluctuations. "We are looking at 220-230 tons a month depending on seasonality - that is a flow that comes out fairly smoothly over the course of the month," said Walker.

The firm launched its 44th edition of the GFMS Gold Survey last week. Its findings highlighted that gold investment demand continued to drive gold prices higher, which rose by close to 26% in 2010. 

The real issue in the gold market is what happens when you see surges in investment demand or a surge in Indian jewelry demand, he said.  "It can amount to 100 tons ( ETF ) in a matter of hours, in the case of Indian demand in a matter of days," said Walker.

"So where the real price pressure comes from is from those kinds of flows. If suddenly people get extremely bullish about gold, you could literally have hundreds of tons of gold demand in a short space of time and that is what really drives the price," he said.

By Daniela Cambone of Kitco News dcambone@kitco.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

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