The mood of the market is softening but much serious thought is being given to the role of gold and its price and demand direction. The superficial analytical froth is being blown of the top of the glass and reality is setting in. We know the numbers: how much there is, how much is newly produced and who are the traditional buyers. So what we are really debating is what is the place of the metal in the future. Is it a store of long term value? Does it have a role in the monetary system? Or is it the sponge which soaks up the fear factor? The upshot is this: what will be the price extremes and what will be their time spans? The role of gold will affect its long term price profile but hardly its rate of new production. It is because the price direction is so uncertain that major new sources will be difficult both to find and to fund. The same cannot be said of platinum because of its tight geographical supply and its industrial applications. And silver? Its value of newly mined production is about one-sixth that of gold but its volume about fifty times. Arguably it could do some catching up.

Surplus stocks are infinitely larger and it has some industrial uses. So poor relation it looks destined to remain.

So whither gold? A busy man of late, Ross Norman, CEO of major London bullion dealers Sharps Pixley, spoke at both the European Gold Forum and Mining Journal’s Gold Day last week. His historic analysis alone was worth the attendance but a summary of his findings was telling. Gold is not in a bubble. Fundamental changes in the monetary markets are seeing to that. The metal’s 17% annual compound increase over the past 12 years has formed a solid base. Investment demand is the key with eastern markets making it much easier for individuals to buy compared with their western counterparts. Don’t be surprised at $3000/oz somewhere down the line.

GFMS does not greatly diverge from this view, but notes that a strong dollar has a negative influence on gold, as now. The dollar strength, of course, has two supports:

• The Eurozone problems continue
• The US is tackling its energy problem.

Yet, every view deserves a hearing:

Silver: The Silver Institute tells us supply fell by 34 Moz to 1040 Moz in 2011. This prompts GFMS to say the price will fluctuate between $28.70 and £32.90/oz in Q2 but watch for a decisive breakout by year end and $40/oz, here we come

Gold: Australia’s Westpac Bank says the bull run is over so look for A$1500/oz (US$1450) by 2014. Meanwhile, GFMS looks for gold to be “well south of $1000/oz in the not too distant future”. Bloomberg says ‘leading analysts’ are going for $1900/oz in Q4. Help!

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About David Hargreaves

David Hargreaves

David Hargreaves is a mining engineer with over forty years of senior experience in the industry. After qualifying in coal mining he worked in the iron ore mines of Quebec and Northwest Ontario before diversifying into other bulk minerals including bauxite. He was Head of Research for stockbrokers James Capel in London from 1974 to 1977 and voted Mining Analyst of the year on three successive occasions.

Since forming his own metals broking and research company in 1977, he has successfully promoted and been a director of several public companies. He currently writes “The Week in Mining”, an incisive review of world mining events, for stockbrokers WH Ireland. David’s research pays particular attention to steel via the iron ore and coal supply industries. He is a Chartered Mining Engineer, Fellow of the Geological Society and the Institute of Mining, Minerals and Materials, and a Member of the Royal Institution. His textbook, “The World Index of Resources and Population” accurately predicted the exponential rise in demand for steel industry products.