By Chris Flood
Financial Times
Central banks are set to become net buyers of gold this year for the first time since 1998, according to GFMS, the metals consultancy.
This reverses the trend of the past decade when central banks, particularly in Europe, reduced their holdings. Central banks have been net sellers of gold in only seven year since the ending of the Bretton Woods exchange rate agreement in 1971.
GFMS said the switch took place in the second quarter and would continue in the second half. Net official sales are forecast to drop 93 per cent this year to less than 20 tonnes, the lowest level since 1988.
GFMS said the gold market stood at a crossroads. On the one hand, if government monetary and fiscal stimulus programmes failed to rejuvenate the world economy and deflation fears increased, gold could fall below $850 by the end of the year as investors returned to the safety of the US Treasury market.
On the other hand, dollar weakness and rising inflationary pressures could drive gold higher.
Philip Klapwijk, GFMS chairman, said: “If inflation’s return becomes obvious and higher than generally forecast [inflation] levels look possible, then gold prices well over $1,000 could be achievable.” He said “on balance” GFMS favoured the latter scenario.
This was in spite of the fact that jewellery demand this year was likely to be the weakest for two decades after a drop of almost 25 per cent in the first half of 2009.
Gold continued to hover around $1,000 a troy ounce on Monday, after breaching that level last week for only the third time in its history.
Worries over an imminent correction have mounted after the largest weekly increase for a decade in bets that prices would rise. The net long position held by speculators stood at a record 29.02m ounces for the week ending September 8, up 6.4m ounces, or 28.3 per cent, on the previous week, according to the Commodity Futures Trading Commission.
UBS said the net long position probably rose further last week.
On previous occasions when the long position has risen by more than 6m ounces in a week, said John Reade, precious metals analyst at UBS, gold prices fell 5.1 per cent on average over the following four weeks.
Mr Reade repeated his forecast for gold to drop to $950 in a month and advised “nimble investors” to take profits and re-enter the market after a correction.
SOURCE: http://www.ft.com/cms/s/0/5963a25e-a157-11de-a88d-00144feabdc0.html