By Steve Fiscor, Editor-in-Chief

Is the bull market for gold over? That was the question posed to a panel at the LBMA LPPM Precious Metals Conference on October 1, in Rome. Philip Klapwijk, managing director, Precious Metals Insights, a renowned precious metals economist, shared his opinions. Looking at current gold prices and the monthly average price charts, gold is clearly no longer in a bull market and is now in a bear market, Klapwijk explained.

One important reason for expecting further downside is the structural gold market surplus, which is very large historically. That is putting downward pressure on prices. The size of the surplus in value terms has fallen by one-third from $120 billion to less than $80 billion. Just as interesting, Klapwijk explained, is the composition of the demand. “The private sector demand from the investors has collapsed to less than half its level in 2012,” Klapwijk said. “In the meantime, the official sector share has grown considerably. Around 50% of all demand for bullion is coming from the official sector on a net basis.”

World investment on a net basis has fallen to levels not seen since 2008 in volume terms and to a level significant below recent peaks. The big story this year is Western disinvestment and the selling of ETF holdings. “When it comes to ETF sales, it’s clear that the selling activity has had a negative impact on gold prices, which explains why gold has fallen so far, so fast. On the other hand, when it comes to the demand for physical gold, which has been impressive in the first half of 2013, one has to bear in mind that the demand has, to a significant extent, been stimulated by the fall in gold prices,” Klapwijk said. If it weren’t for this outstanding level of physical demand, Klapwijk believes gold prices would have been significantly weaker.

Forward pricing to a large extent will be determined by this interplay of different sources of investment demand for gold, Klapwijk explained. The possibility of further ETF sales exists. On any dip in price, physical demand for gold bullion will grow, driven higher by mostly Asian investors.

“Overall, we are clearly in bear market mode for the time being, but eventually we are likely to see prices improve again, and in the medium to long term, that improvement will lead to a new high for gold and a new bull market,” Klapwijk said. “Looking at the recent $200/oz recovery in prices, I’m not sure the June low of $1,192/oz will be the low for this bear market. And, that thinking has been reinforced by gold’s inability to move higher in recent weeks.”

The yellow metal’s lack of reaction to continued quantitative easing (QE) and the U.S. debt problems has been disappointing for gold bulls. Strong seasonal demand for gold from India and China is approaching in the next few months. “Once that period of seasonal strength ends, we could see renewed downward pressure on gold prices and a possible new low as soon as February 2014,” Klapwijk said.

Asian demand over the next few months deserves close attention especially the level of Chinese purchases—not just the private sector, but the level of demand from the official sector in China. Over the first half of 2013, the Chinese official sector probably absorbed 300 metric tons (mt) of gold and that necessitated a much higher level of bullion imports given the Chinese authorities were buying so much in the domestic markets, Klapwijk explained. “If Asian demand slackens, then a new low is likely,” Klapwijk said.

A further round of ETF selling could exacerbate the situation. “We could see gold slump to $1,000/oz to $1,100/oz during the second quarter of 2014,” Klapwijk said. “For Western investors to return to the market, the gold market would need a new set of extreme economic circumstances. They will develop over the next few years. We will see much higher rates of inflation due to loose monetary policy and QE in particular. If investors start to believe the government paper they hold is being inflated away, they will seek gold as a safe haven.” This is several years away and the gold bulls will have to wait patiently as gold prices drop to a new low, Klapwijk explained, before a recovery begins in the later part of 2014 or the early part of 2015.

To listen to Klapwijk’s podcast and see the slides of his presentation, visit:

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