Investment demand has been the main driver of Gold prices over the past couple of years while jewelry demand has been stagnant, according to Carlos Sanchez, Associate Director of Research, CPM Group, New York.

In an interview to Mike Norman, HardAssetsInvestor.com, Sanchez said that gold prices could move upto $1200 per ounce by year end.

Norman: Sure. You guys are very much involved in metals; gold, precious metals. Let’s talk about it. I mean, gold has been on a tear; very, very strong. We had one of your colleagues here several months ago, Jeff Christian, at the time when gold was probably more or less around $900 an ounce. He was not that bullish at the time, looking at fundamentals such as actual physical demand, mine output, etc. Yet we have broken through; we’ve seen gold vault up above the $1,100 figure. How high do you think it could go?

Sanchez: Well back then, we didn’t expect prices to perhaps rally as high as it did so quickly. We had expected prices to move higher, but over the course of later this year and into the first quarter of next year. Now we’re expecting prices probably to top $1,200 before year-end.

Norman: We’re not that far away as of this taping, anyway. We’re about $65 away, so percentagewise, that’s not a big jump.

Sanchez: Right.

Norman: Let’s break it down. I think from what I’ve read, on the physical side, mine output increasing; jewelry demand, which has historically been the principal source of demand, pretty stagnant; economic growth worldwide coming back a little bit, but nothing to write home about. So when you look at it from that perspective, it doesn’t seem to create a very bullish picture. However, on the flip side, you have a tremendous amount of investment demand. Is that really what’s behind it?

Sanchez: Right. Investment demand has been the main driver behind prices over the past couple of years and more so over the past several months. I think investors continue to be concerned over financial markets, economic conditions and political conditions as well. So I think with weak economic growth, with high unemployment, with what’s going on in Afghanistan, Iran, etc., you have increased concern. And investors continue to rush to safe-haven assets such as gold.

Norman: By the same token however, we’ve seen since March, the last six, seven months, a very significant rally in the stock market, not just here in the United States, but globally. As a matter of fact, even if you look at the Dow and you compare it to gold, basically the same percentage gain over that course of time.

So these arguments, while I understand that there are still fears and concerns out there, it seems like with a lot of bearish arguments, many of them are kind of going away. And are investors sort of coming up with new bullish-for-gold arguments, and bearish on the general economy, even though we’re starting to see things improve?

Sanchez: Even despite the recent stabilization and the pickup in stock markets over the past several months, I think there’s concern that stock markets remain vulnerable, not only in the U.S., but around the world. You also have increased concern over the economic conditions. There have been signs of stabilization, but they still remain vulnerable. Economic growth has not been as it was over the past several years.

Norman: When you look at gold adjusted for inflation, we’re still probably halfway to the peak we saw in 1980. In other words, gold’s probably got to get back to somewhere around $2,200 to equal on an inflation-adjusted basis what we saw back in 1980.

That seems to me like the number the market is shooting for, even though it represents a doubling in price from where we are right now. But what about some of these extreme forecasts? I’ve heard people say, “We’re going to $5,000. We’re going to $10,000, $20,000 an ounce.” Are those realistic?

Sanchez: I don’t think they’re realistic now. I think we’ll have to wait to see what happens over the next several months. But I think $1,400; $1,500 is definitely a possibility, perhaps early next year. As far as $2,200, I think economic conditions will probably have to deteriorate from here going forward for us to see that price level.

Norman: Now if they don’t deteriorate, if we continue to see the stock market improve and maybe even start to see some job creation at some point … don’t forget, back in 2003, I remember very well the so-called jobless recovery turned into a recovery that actually created jobs. Can we have a scenario where Gold continues to appreciate even though real economic conditions improve?

Sanchez: You know, if economic conditions do improve and you see a steady decline in unemployment, a stabilization in economic conditions and financial markets, you may see gold price gains capped. But at the same time, they will be supported. Because it will take several years for unemployment to move back to levels where it was prior to this recent financial calamity.

Norman: So from your perspective, there’s no element of excess speculation or sort of a bubble environment right now when we talk about gold?

Sanchez: I think investors have helped push prices higher. They’ve been chasing prices higher, and that’s helped sort of continue that cycle of rising prices. Perhaps once investors see that their price targets have been hit, there will be a pullback in prices. But at the same time, that pullback may not be as sharp as some expect. I think the pullback, as we’ve seen over the past several months, has been $30 to $40. But at the same time, the investors have been willing to buy gold at increasingly higher levels.

Norman: All right. So just quickly, would you say the new floor, what price level is that? $700, $800?

Sanchez: On a short-term basis, I think that price level is $1,100 …

Norman: $1,100?

Sanchez: … $1,100 for the rest of year. If prices do fall below that, I think you could see increased buying. There’s potential for prices to fall perhaps $40 to $50 lower. But that would, I think, pick up investor attitudes, and there could be some increased buying there. But next year the floor may be $1,000, $900.

Norman: All right, there you have it. Still bullish folks; still bullish on gold, heading back, as Carlos said, probably $1,200 to $1,400 by the end of this year and still looking for that 1980 price peak in inflation-adjusted dollars of $2,200. That’s it for this portion of my interview with Carlos. We will be back talking about some more of the metals, Silver in particular. So as always, stick around; plenty of good stuff on this site right here at HardAssetsInvestor.com. I’m Mike Norman, signing off for now. Take care. Bye-bye.

Courtesy: www.hardassetsinvestor.com

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