"There is a higher starting point for each successive investor-led rally in the price. Thus, assuming investment demand will at some point take off again this year, there remains good scope for new highs in the price to be recorded," the consultancy said....Also adding to gold demand is further fiscal difficulties and more eruptions of fiscal crises.
"Indeed, we would expect the next waves of investor buying to take gold to above $1,500/oz, and then to the $1,600/oz mark before the end of 2011," GFMS said.
GFMS' Gold Survey 2011 contains some worrisome news for senior producers but not for holders of physical gold. Gold production increased by 4%, following gold's rise, but producers are being dogged by cost inflation and lower grades.
Costs increased sharply in 2010. Cash costs rose by $79/ounce to $557 and GFMS notes that cost-inflation is with us once more, "returning to the 15-25% levels that prevailed from 2003-2008". Total costs also increased by 17%, while all-in costs (derived from a proprietary model and taking account of all cash and non-cash costs, sustaining capital expenditure, indirect costs and overheads) rose by 20% to $857/ounce. Average total cash margins, meanwhile, increased from $495/ounce to $668/ounce. Last year's increase in average costs was the ninth successive annual rise, both in money-of-the-day and in constant money terms.
Although input cost inflation components all increased, the more significant increases came from unfavourable exchange rate movements, lower grades and higher strip ratios....
GFMS records a 30% fall in average grades since 1999, during which time gold prices have quintupled. This fall is largely due to a price-driven reduction inI cut-off grade and goes part of the way to explaining why gold mine production has not expanded by as much as might be expected.
Of course, the cost squeezes have already been factored into the price of senior producers' shares - perhaps overfactored. As long as production can't ramp up all that much, gold itself won't be hampered by supply floods.