MORE BOUNCE BY THE OUNCE: Gold is expected to thrive next year as the dollar weakens.

Some analysts predict it may even breach the psychological barrier of $1000/oz as world demand peaks and supplies shorten.

‘Supply and demand factors will begin to make their presence felt’

Profit taking has seen the price see-sawing on either side of the 800/oz mark

Gold is on course to end 2007 at least 100 an ounce higher, setting the precious metal up for its seventh consecutive year of gains in 2008.

An ounce of gold cost $629.80 at the start of 2007 and was trading close to 800/oz by mid-December after touching $841.10 in November, its highest level since 1980.

Gold has been rallying since the second quarter of 2001 and at its November high was more than three times the $254.75/oz it bottomed out at in April 2001.

Needless to say, the metal has come a long way since the beginning of the 1970s, when gold was about $35/oz.

What gold’s rise since the 1970s proves is that while it may not be as cyclical as other commodities, it is vulnerable to occasional violent shake outs, often preceding a new rally.

Profit taking has seen the price see-sawing on either side of the $800/oz mark in the days leading up to the end of the year, but most analysts don’t believe that the bull run is over and are predicting that the price will deliver more of the same in 2008.

More than any other factor, the US economy is seen as the main driver of gold in the year ahead.

Aside from the greenback’s fall from grace, the sub-prime crisis and the risk of a US recession have backed the flight to investments such as gold, while inflationary pressures and geopolitical instability have fanned the flames.

Analysts are saying that the factors supporting gold’s uptrend are likely to remain unchanged in the medium term.

Dominic McCormick, chief investment officer at Australia’s Select Asset Management, said: “Indeed, in many respects the current environment is almost ideal for gold. We are seeing a continued erosion of confidence in the US dollar, which has been the cornerstone of the world financial system since and even before a formal link to gold was cut in 1971.”

The dollar and gold generally move inversely to each other, as gold is often seen as a hedge against inflation, and if the US Federal Reserve continues to cut interest rates, the gold price is likely to rise as investor demand grows.

“The dollar is highly unlikely to strengthen until 2009,” said Jessica Cross, chief executive of commodities consultancy VM Group, which believes the gold price will rise to $900/oz some time in 2008.

But Gold Field Mineral Services’ chairman Philip Klapwijk has suggested that spot gold prices might even breach the psychological mark of $1000/oz in 2008.

JPMorgan increased its gold price forecast for next year to $814/oz from $716/oz and for 2009 to $767/oz from $698/oz, an increase of almost 100.

JPMorgan said it expected strong demand from India, China and the Middle East to remain positive for gold next year.

In the meantime, Credit Suisse calculated that for every one-cent change in the US dollar exchange rate, the gold price moved by $8/oz.

It said in a gold note at the end of October that dollar weakness, higher oil prices and increasing geopolitical trends would push gold to the $800/oz level by New Year.

But in the longer term it foresaw the gold price hitting $1050 an ounce by 2012 as dwindling supply of the precious metal combines with increased demand.

Analyst David Davis said the dynamics surrounding gold supply and demand had begun to change inexorably towards a diminishing supply of gold and increasing investment demand.

“Our studies indicate primary supply will begin to decline as the diminishing number of new reserves fails to compensate for dying mines,” Davis said.

While Credit Suisse believes the US dollar will continue to underpin the gold price, “supply and demand factors will begin to make their presence felt to such an extent that they alone (or in combination) could trigger a upward change in the gold price, enough to sustain a new gold price/ equilibrium”.

VM Group anticipates a supply surplus of 123 tons on total supply of 3.75-million ounces and total demand of nearly 3.63-million ounces next year. However, since the surplus is so small it could turn into a deficit if any of the major components change, including sources of supply, such as mine supply or central bank sales, and sources of demand, such as jewellery and dehedging. So it could be argued at these levels, gold still looks cheap. — I-Net Bridge

http://www.thetimes.co.za/News/Article.aspx?id=666366

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