Gold price tipped to improve but market not following suit

The World Gold Council has told the Diggers and Dealers mining conference that gold prices will improve over the long term due to strong demand from China and India.

The resources super cycle is not over but in a readjustment phase, World Gold Council managing director of investment Marcus Grubb said.

He explained gold demand is driven by wealth, demographics, savings rates, weddings and festivals and will continue to grow as India and China increase wealth.

"Once we've gone through this short term readjustment in the market we believe the long term outlook is very positive," he said.

However Grubb conceded this has been ‘a vicious correction’.

Overnight the spot gold price hit its lowest level in nearly three weeks, sliding to US$1281.80 an ounce on the back of speculation that the Federal Reserve will scale back U.S. bond purchases.

The decline is the sixth in a row.

While gold has already slipped more than 20 per cent this year, forcing extensive layoffs across the gold mining sector.

However Grubb said the World Gold Council was still bullish about the long-term market for gold.

He said the gold market would become stronger towards the end of this year and into 2014.

"Six to eight per cent (annual) return on gold in a recovering world with stronger equity markets and rising interest rates … that's the scenario I think is most likely," he said.

Grubb also highlighted the huge demand from China and India who make up 50 per cent of the global gold market.

Demand from China in particular has soared, with 776 tonnes of gold bought over the past year.

"This market has blown the doors off. This could be a 1,000 tonne plus market by the end of the year," Grubb said.

He added that when gold prices fell in April, gold shops across China and India sold all of their merchandise.

"There's no doubt of the strength of demand of this gold price and this demand isn't going to go away," Grubb said.

"As India and China get more wealthy they're going to buy more gold."

A senior commodity analyst at Commerzbank AG told the Wall Street Journal that because the World Gold Council acted as a lobby group for producers, they were more optimistic by nature.

“The WGC expects supply to tighten because gold mining producers are cutting spending and shutting down high-cost mines. In the WGC’s view, mining production this year could remain at last year’s level and could subsequently even drop,” Commerzbank analysts said.

“We would question whether this would already be enough to offset the fall in investment demand, however,” they added.

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