Gold May Climb to $1,600 an Ounce on Low Rates, Debt Concerns, GFMS Says

Gold may rise to $1,600 an ounce in 2011, 16 percent more than today, as low interest rates and the possibility of sovereign debt defaults spur demand for the precious metal, according to London-based researcher GFMS Ltd.

Gold may attract a “major expansion in investment before the gold bubble inevitably bursts,” London-based GFMS said today in a report. Gold investment, including in bars and coins, will jump 15 percent in the first six months of this year from the same period last year, the researcher estimates.

“We are looking at more of the price strength to occur later into the year,” said Neil Meader, head of research at GFMS in London. In the first half, “I certainly don’t think we could rule out a correction of substance. That could easily mean the low $1,300s” an ounce,” he said.

Gold climbed 30 percent last year, rising to a record $1,432.50 an ounce in New York, as governments became net buyers of the metal for the first time since 1988, led by Russia’s purchase of 135 metric tons, according to GFMS. Jewelry demand rose 16 percent and bar hoarding more than doubled, the researcher estimates.

“For prices to stay firm, the market is clearly dependent on investment,” GFMS said. “Investors and some official sector institutions will be very concerned at the growing risks of currency debasement, be that via inflation or depreciation, and of sovereign debt default.”

Gold futures for February delivery fell $2.80, or 0.2 percent, to $1,383 an ounce by 11:58 a.m. on the Comex in New York.

Bailouts, Inflation

Investors in the U.S. and Europe bought gold to hedge against currency devaluation as the Federal Reserve kept borrowing costs near zero percent and the European Union and the International Monetary Fund bailed out Greece and Ireland. Investors in recovering economies in China and India used gold to hedge against inflation, GFMS said.

Demand for gold rose 0.5 percent to 4,306 tons in 2010, GFMS estimates. Investment demand fell 15 percent to 1,616 tons, led by a drop in Western countries, the researcher said.

India accounted for 87 percent of jewelry purchases last year as demand rose to 2,037 tons, GFMS said. Jewelry demand may drop 7 percent in the first half of 2011 as prices above $1,400 an ounce deter buyers, according to GFMS.

Australia Gains

A projected 6 percent increase in mine supply in the first half of this year may also limit price gains, GFMS said. Mine production rose 2.7 percent to a record 2,652 tons last year, GFMS said. Australian output climbed 16 percent, overtaking South Africa and the U.S. to become the world’s second-biggest producer after China, GFMS estimates.

Net official sector purchases were 87 tons against sales of 30 tons in 2009, GFMS said. The IMF disposed of 191.3 tons through September while Thailand purchased 16 tons and Bangladesh bought 10 tons last year, according to GFMS.