The short-term price of gold may exceed $1,000/oz this year or early 2009, suggests the London-based consultancy group GFMS in its latest survey of the gold market. This probably isn't much of a stretch since the spot gold price for the year was averaging $923/oz through early April, and the GFMS analysis says investors are driving up prices simply by seeking a “safe haven” for investments.

The speculative investment in gold has been caused by the ongoing credit market crisis, lower U.S. interest rates, rising inflation and heightened political tensions, says Philip Klapwijk, GFMS' executive chairman. In fact, while gold experienced a slight late first-quarter slippage in prices, GFMS expects the ongoing credit crisis to continue fueling investment purchases of the precious metal. “Driven by growing risk aversion, a weakening U.S. dollar, a clearly problematic financial services sector and expectations of lower equity prices, investors have increasingly recognized gold's 'safe-haven' attributes,” Klapwijk says.

So, GFMS expects what it calls “the very positive climate for gold investment” to continue at least until late 2008 and possibly into the first half of 2009. And there will be plenty of supply, GFMS forecasts that global mine production in 2008 “will remain broadly in line” with the tonnage recorded in 2007—which was down just 0.4% from 2006.

However, the gold market research organization warns against “irrational exuberance” toward the high gold prices because of its concern over the rapidly widening gap between mine production and falling jewelry demand, the main home for the precious metal. As a result, longer-term gold prices are forecast to stabilize near $600/oz.

GFMS research shows that all regions except for Asia recorded declines, with Africa registering the greatest drop of 29 metric tons. In South Africa, the production decline was caused by lower grades of mined ore and some temporary mine closures so heightened safety controls could be installed towards the end of the year. Elsewhere in Africa, poor weather, labor disputes and processing difficulties dampened output.

North American production fell for the seventh consecutive year, while Latin America registered an almost 23-metric ton decline despite strong gains in Brazil, Mexico and Guatemala. Production in the former Commonwealth of Independent States declined modestly, driven primarily by a fall in Russian output. Australia broadly maintained 2006 levels.

Strong growth was seen in Asia from China, Indonesia, Papua New Guinea and the Philippines. Of note was the fact that China posted a 33 metric ton increase to become the top global performer, overtaking South Africa's century-long position as the world's leading gold producer. Klapwijk says in the report that China is expected to consolidate its lead in 2008, “primarily as a result of further declines expected in South Africa due to its ongoing power supply issues.”

As for demand, GFMS says global purchasing to make jewelry staged a partial recovery in 2007, but substantial reductions in fabrication are expected in 2008. “The impact of rising and volatile gold prices has had a pronounced impact on the jewelry market,” the report says, noting that fourth quarter, 2007 demand dropped by more than 20% year-on-year while prices were rising by 28% from the year-earlier quarter.

Looking ahead to this year, Klapwijk explains why global jewelry demand could see a substantial 200 metric-ton drop: “Not only is the jewelry market having to contend with record gold prices but there is added uncertainty from the price volatility both manufacturers and retailers are having to contend with.”