Gold price in 2013: watch out for risk of bubble burst

Gold demand has slowed and supply is on the rise, while stocks become attractive again; will the price of gold take a break?

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Gold prices have increased from around $300 per ounce in the year 2000 to the current level of nearly $1,700, but analysts at Societe Generale warn that the precious metal's rise might take a break this year.
They point out that demand fell by 11% in the third quarter of last year compared with the same quarter of 2011, mainly because of moderate consumption in the world's two biggest consumers of gold, China and India.
Meanwhile, supply, which "seemed to have stagnated in the past two years without any impact on the gold price," is set to increase this year and in 2014, Societe Generale's analysts wrote in a market note.
Production should rise in China, where consumer demand should pick up in the medium term with the rise of the middle class, especially if the new government manages to implement reforms to avoid a hard landing.
The analysts noted that China was buying foreign gold mines, as it did for many other commodities that it needs.
They identified three negative factors for gold: the first is that equities "stand at their lowest level in 20 years relative to gold, making the latter less attractive." The second is the fact that, amid signs of a stronger economic recovery, the US dollar could appreciate and interest rates could rise. And the third negative factor is that, despite predictions that major central banks' unprecedented levels of money-printing, inflation is "still under control."

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Besides, since the year 2000 gold returns "have been much higher compared to the rest of the century" and the price of gold, despite a recent correction, remains near historical highs, the analysts said.
But they also identified positive factors which could mean that gold prices still have upside potential, such as renewed monetary easing which could push the price higher, demand from emerging countries which may increase further and the fact that, in the long run, gold "may play a role in the transition to an international currency system."
Demand for gold in China, despite the recent cooling off because of the economic slowdown, could be an opportunity as in the long run greater affluence of the population should contribute to a revival in gold buying, they said.
Gold buying for reserves could be another area where demand from China could rise. China's gold reserves represent 0.75% of its 2012 gross domestic product, compared with 9.52% for Switzerland, 5.55% for Germany, 2.96% for the US and 1.78% for India.