Philip Klapwijk: A Coming Bear Market For Gold?

July 17, 2009

The executive chairman of GFMS Group gives his big-picture outlook on the gold market.
  • Gold's rising price floor
  • Demand difference between East and West
  • Real market recovery: myth or reality?


Gold, gold and more gold: That was the theme when we sat down with Philip Klapwijk, executive chairman of GFMS Ltd., an independent, U.K.-based precious metals research firm specializing in silver, platinum, palladium, and, of course, gold.

With GFMS' gold research team since 1989, Klapwijk is widely regarded as one of the world's foremost authorities on gold. His expertise includes the general sector, investment and fabrication demand in the Americas and Europe. Klapwijk is also editor of The Outlook for Gold Investment, and helps oversee production of the annual Gold Market Report, which sets the gold market's tone for the year to come.

HAI associate editor Lara Crigger recently chatted with Klapwijk about gold's rising price floor, the demand difference between East and West, and why gold's headed for a bear market.


Lara Crigger, associate editor, (Crigger): The last time we talked, gold had just broken $1,000/oz. These days, it's hovering a bit below that. So where do you think gold's going, and why?

Philip Klapwijk, executive chairman, FGMS Group (Klapwijk): We're seeing a very powerful rally, from gold testing lows of around $905 a few days ago, to now, where we're pushing the $940 level. Following this brief excursion to the upper end of that range, we're probably going to come back down in the next couple weeks to test the bottom of that range, and potentially break through it briefly into the $890s.

That's because, at the moment, gold is being buoyed by a rebound in economic optimism. You've seen stocks picking up, we've got oil back above $60, and so on. But I think those factors are likely to reverse in the next couple of months. Personally, I'm not convinced there's much real recovery in the economy. I think there's been a fair amount of spin and selective interpretation of data, and the real situation remains pretty dire.

Also, we have a large long position on the COMEX, which I think is overhanging the market to some extent, and that will probably reduce in size. These things tend to go in cycles. So I think we're going to see a cycle of length reduction: growth in shorts on the futures market, and a long liquidation phase. That's going to also help us get temporarily at least below $900, or at least test that level very seriously.

So the most likely thing now, I think, is that we'll see gold in the short term move lower over the rest of the summer, which will then set us up for an autumn rally to see us move considerably higher. But we shouldn't lose sight of the big picture, which is that we're seeing a ratcheting up of the floor in gold. I mean, yes, I'm saying gold will test $900, but I do still feel this market is moving higher, and we'll break out of this $900-$950 range we've had for awhile. I just don't see why it should happen quite yet.

Crigger: How are the demand fundamentals looking?

Klapwijk: The underlying state of demand is poor, particularly for jewelry. That's being exacerbated by the seasonal lull we have in July and August, when across the world, the jewelry manufacturing industry is in its seasonally weak phase.

There are one or two points that are reasonably positive. For example, if you look at the floor for the price, which is still being set by physical buyers of gold for industry and jewelry, that floor has ratcheted up. Jewelry market buyers are now quite happy to concentrate their demand at around the $900 level, versus last year third quarter, when the price had to go down to $700/ounce before you really saw good physical demand. So you could argue that the floor for the price has ratcheted up $100-200. That's a fundamentally healthy development.

But that doesn't mean the jewelry demand situation is at all healthy - it's not. If we look at the market in general terms, the fact is that the high price and high volatility, coupled with the weak economy, has really damaged jewelry demand significantly. That means that this is now a market where demand is increasingly dependent on the investor.

Should that investor go away at some point, due to economic or financial circumstances changing radically, you'd require a fairly large fall in the price for the market to reach equilibrium.


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