Gold price forecasts have become increasingly popular given the recent volatility in the price of gold. The most recent party to chime in with a 2010 gold prediction was London-based consultant GFMS Ltd. - which presented its outlook on both gold and silver at Scotia’s Commodities outlook 2010 conference held in Toronto, Canada. GFMS, which has been covering the precious metals sector for over 40 years, expects the gold price to advance as high as $1,300 per ounce in the coming year as investment demand continues to be the key driver of the gold price. While the price of gold could correct toward $1,000 per ounce due to profit taking, the firm’s outlook is that the gold price is much more likely to climb due to large fiscal deficits, low interest rates, fears of a double-dip global recession, and weak production growth. GFMS forecasts a range of $990 to $1,340 per ounce for the gold price and average silver price of $18.00 per ounce - with a range of $14.40 to $22.00 for gold’s sister precious metal.

In the 2010 survey, GFMS Chairman Philip Klapwijk - the most accurate gold forecaster in the London Bullion Market Association’s 2009 survey - forecasted an average annual gold price of $1,172 per ounce. Chairman Klapwijk commented that “There has been much discussion about whether the gold price has already peaked, but our base case is that the economic recovery will prove sluggish. This suggests that there may be little or no tightening of fiscal and monetary policies this year in a number of the major economies, most pertinently for gold, including the United States. That raises serious questions about the creditworthiness of governments and the outlook for inflation further down the path. These are factors that are driving portfolio managers to look for further opportunities to enter the gold market.”

GFMS estimated that global investment demand for gold, including in bars and coins, doubled in 2009 to 1,820 metric tons, surpassing demand for gold jewelry for the first time since the 1970s. Moreover, the report projected continued weakness in the U.S. dollar and went on to say that “The incentives to invest in gold should therefore be powerful this year. We sense that there is a large amount of money poised to enter the gold market in 2010.” Chairman Klapwijk elaborated on this factor, stating there is a significant likelihood of increasing fund flows into the gold market from institutions in 2010 - including pension funds, insurance companies, and sovereign wealth funds. He went on to say that “I think in the second half of the year we could see prices increase above the $1300 level quite easily, if that flow comes into the market.”

The gold price traded marginally higher following this morning’s news that the European Central Bank (ECB) left its benchmark interest rate unchanged at 1.0%. While the ECB news came as little surprise to most economists - a Reuters poll of 80 participants unanimously forecasted interest rates to remain at 1.0% for the eighth month in a row - remarks from ECB President Jean-Claude Trichet’s introductory statement indicated the central bank remains concerned about deflation risks. As alluded to in these pages on numerous occasions, central bank policies focused on extinguishing deflation provide a tailwind for the gold price and gold mining stocks.

In President Trichet’s introductory statement at his press conference, he alluded to the subdued inflation data, commenting that “A cross-check of the outcome of the economic analysis with that of the monetary analysis confirms the assessment of low inflationary pressure over the medium term, given the ongoing parallel decline in money and credit growth.” Moreover, he alluded to concerns regarding the sustainability of the economic recovery when he stated that some of the factors fueling European GDP growth are “of a temporary nature.”

Risks of sovereign defaults across Europe have also heightened deflation risks in the Eurozone, and Trichet addressed the increasing credit issues facing nations such as Greece and Spain. Although not specifically referencing individual countries, Trichet commented that the large government borrowing requirements in many euro area governments “carry the risk of triggering rapid changes in market sentiment” and that “high levels of public deficit and debt would place an additional burden on monetary policy.” As such, the ECB called upon European governments to “implement in a timely fashion ambitious fiscal exit and consolidation strategies based on realistic growth assumptions, with a strong focus on expenditure reforms.”

While some emerging market nations have recovered more quickly from the financial crisis, many of the larger global economies remain mired with deflationary credit issues that threaten the sustainability of a global economic recovery. As indicated by both the ECB and GFMS, the world’s most influential central banks have, so far, shown little sign of closing the monetary spigots. If this battle against deflation involves further stimulus and money printing, the longer-term outlook for the gold price and gold mining stocks will continue to be positive.