US Downgrade to Boost Gold

January 17, 2013 at 10:10

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A likely US credit rating downgrade will spur a fresh wave of investment in gold this year, helping the metal return to record prices, according to a leading precious metals consultancy.

Thomson Reuters GFMS, which produces benchmark supply and demand statistics for the gold market, acknowledged that some investors had become disillusioned with the precious metal’s recent performance but predicted a turnround in fortunes.

“What we’re seeing is a fairly extended pause and period of consolidation before gold makes another move higher,” said Philip Klapwijk, head of metals analytics. “The US is bound to lose its triple A rating.”

Standard & Poor’s stripped the US of its triple A rating in August 2011, helping to drive gold prices to a nominal record of $1,920 a troy ounce – a price level that has not been reached since.

More recently, with US politicians haggling over the fiscal cliff and debt ceiling, rating agencies have been warning of more downgrades. “I really do think it’s something that people are incredibly sanguine about – the prospect that the largest triple A market in the world suddenly ain’t so,” Mr Klapwijk said. “There will be people forced to sell US government obligations and seek other homes for their money.”

Mr Klapwijk predicted that, along with continued loose monetary policy, would drive gold to a record high. Gold traded at $1,679.50 on Wednesday.

“We feel that US economic prospects are not as rosy as some believe and that there will not be sufficient progress for the Fed to change policy this year,” he said.

However, GFMS recognised a “growing voice that the decade-long rally might be over”.

“There has definitely been a loss of momentum,” Mr Klapwijk said. “Some classes of buyers have pretty much filled their boots and may even have been prepared to offload a bit. New buyers haven’t stepped up to keep the price higher.”

He said that the prospect of tightening monetary policy in the US towards the end of 2014 could mark the end of the gold bull market. “You’ve got to see a new high this year to validate the gold bull market. If we don’t get that, time could start to run out.”

Weaker demand from the key Asian markets of India and China also helped to keep gold prices subdued last year. Chinese jewellery and investment demand were down 1 and 2 per cent respectively last year, while Indian net imports fell by about a third, GFMS said. Nonetheless, India held on to its position as the world’s largest gold consumer, buying about 40 tonnes more of the metal than China, Mr Klapwijk said.

“We are pretty confident that China will at last get the number one spot this year,” he added.