A new study by TD Economics should make gold bugs happy. It concludes that the price of gold is likely to trend modestly higher in the coming years.

Over the past 20 years, gold has endured hard times, with the precious metal losing more than two-thirds of its market value. “A weakening in the U.S. dollar is expected to boost the price of gold to US$290 per ounce by the end of 2002,” says Craig Alexander, senior economist at TD Bank. “Continued growth in world gold demand and limits on gold sales and lending by central banks should allow the price of gold to reach US$320 by 2004.”

Global demand for gold has been steadily rising in recent years. Over the last decade, demand has increased annually by approximately 2.6%. “Although gold’s appeal as an investment asset has declined, increased use of gold in jewellery and other products has provided more than an offset,” notes Alexander.

The low price of gold has limited the increase of supply from mines. Over the last decade, newly mined gold increased by only 2.0% per year. As a result, the 2,573 tonnes of gold extracted from mines last year fell well short of the 3,946 tonnes used in jewellery, fabricated products and investments. “After making allowance for gold scrap entering the market, annual gold supply still fell short of world demand by roughly 660 tonnes per year in the 1990s,” remarks Alexander.

Since the demise of the gold standard in the 1970s, many central banks and international monetary institutions have concluded that they held excessive quantities of gold. From 1990 to 2000, net official gold sales totalled 3,600 tonnes, which translates into average sales of around 330 tonnes per year — roughly half of the supply shortfall. Although central bank gold sales have grabbed headlines, the increasing practice of central bank gold lending has been just as important in terms of increasing market supply of the precious metal and depressing prices.

“Gold prices are unlikely to fall significantly lower in the coming months, while the medium-term outlook for demand and supply suggests that the price of gold will gradually rise in the years ahead,” says Alexander. Demand is expected to continue to rise, boosted by a global economic recovery in 2002 that will be supportive to the buying of luxury goods, such as gold jewellery. Currency trends will also provide support to gold.