Heavy investment-led gold buying was the key factor driving bullion prices to their second-highest level ever last year, according to a new report published Thursday by CPM Group, a New York-based specialty consulting firm.
The last time prices were close to 2006's mean level of $607 an ounce was in 1980. At that time the average price hit $612 and gold peaked at $850 on an intraday basis.
"Lower sales by central banks and declining mine production aided the increase in prices, but the premier reason for the high gold prices was investment demand," states CPM Group's
Gold Yearbook 2007
which was put together by a team of analysts led by company founder Jeff Christian.
The good news for the bulls is that historically high levels of gold buying by investors will likely continue through this year, the study concludes.
At least part of the story has been the continued success of the gold exchange-traded funds, such as
streetTracks Gold Shares
iShares Comex Gold Trust
, which now hold more than 15 million ounces and 1.4 million ounces of bullion, respectively. Other ETFs outside the U.S. hold more gold.
Worldwide, buying via the ETFs accounted for almost 19% of the total 43.5 million ounces purchased by investors in 2006, according to estimates from CPM.
A year earlier such buyers added 46.7 million ounces across all products, bringing investment holdings accumulated since the start of the current bull cycle in 2001 to almost a quarter billion ounces. That compares with 20 million to 50 million for previous sustained rallies.
"Never before in history have so many investors,
... spent so much money buying so much gold over such an extended period of time," the study says.
High investment buying should continue this year, the report says, but the tonnage of gold actually purchased will depend on how investors see the world. Political crises, oil supply worries and the prospects for the dollar are all vital factors.
The authors think such anxieties ultimately will be somewhat reduced, which explains why they're projecting a drop of investment buying of almost 9% for the year, to 39.7 million ounces. They do note that demand can turn on a dime, which means the total for this year could be much higher or lower.
Looking forward there are some concerns, notably the burgeoning inventories of gold in market centers such as London and Dubai.
"Some of it appears to represent metal that is being bought by bullion dealers
without ready buyers eager to acquire them," the report states. "It reflects a risk to future gold prices," if they are dumped onto the open market.
Longer term, the authors warn of increasing mine supply in the years ahead, with "a gold rush of unprecedented proportions" under way around the globe, and estimates of new annual production totals rising at least 14 million ounces a year by 2011, or more than 10% of current yearly output.
With that supply coming on line it looks likely prices will eventually soften to an equilibrium level at around $350 to $400, "barring extreme levels of investment demand or central bank selling," the report states.