The price of gold is expected to climb to fresh long-term highs during 2006, mainly on the back of investor demand for the metal, analysts and traders said.
Other factors expected to boost gold in 2006 are increased central-bank buying of gold for reserve holdings as well as inflationary concerns.
However, the key negative factor for gold is the large speculative length in the metal, held in futures markets, which increases the potential for a violent correction should the positive sentiment in gold turn, analysts said.
The positive factors expected to support gold are negative real United States interest rates, the breakdown in the relationship between the gold price and the dollar, strong jewellery growth, investor demand from exchange-traded funds and muted gold-supply growth.
“The outlook for gold is difficult to call, but the metal could move higher on an increase in the oil price, as inflation is good for gold. As long as the crude oil price is above $60 a barrel, then gold will move higher.
“Key to the gold market was Asian central bank buying of gold. The Russian central bank recently indicated that it had started to buy gold,” said Investec gold analyst Leon Esterhuizen.
Brent crude oil price was last quoted at $57 a barrel, up $0,28 a barrel from Wednesday’s close.
At 5.42pm on Thursday, the spot price of gold was quoted at $501 a troy ounce, up $5,60/oz from the previous close.
On December 12, gold surged to $541,80/oz, the highest level for the precious metal since March 1981, when gold fixed at a high of $547,25/oz.
In January 1980, gold fixed at an all-time high of $850/oz.
“Price dynamics in gold next year will continue to be largely determined by speculative interest, backed by myriad justifications like inflationary risks, energy-price led economic slowdown, expectations of a US dollar correction, soaring physical demand, supply-side constraints, hopes of large-scale central-bank buying and so on,” London-based Barclays Capital analyst Yingxi Yu wrote.
“The strong price action and impressive technical trends in various currencies suggest prices should remain elevated in 2006,” Yu added.
“The positive factor we identify for gold is our expectations for the depreciation of the US dollar. The surge in fund interest has allowed gold to rise despite the strengthening dollar recently. That said, we believe that dollar weakness would only serve to add fuel to the general bullish sentiment,” Yu said.
“I expect gold to average $540/oz in 2006 and end 2006 at about $580/oz or the high $500s. The key driver will be investor demand for gold, unless there is an unexpected event like a nuclear terrorist act in the US. In 2006, central bank buying will also boost gold,” a London-based trader said.
“The bull run in gold should resume in the New Year and gold should gradually move higher in the coming months. Gold should end 2006 in the high $500s,” he added.
Merrill Lynch’s David Hall recently forecast that gold would average $525/oz in 2006 followed by $500/oz in 2007.
Hall forecast gold to hit a peak of $530/oz in the first half of 2006.
Negative real US Federal Reserve fund rates are positive for gold investment as an alternate currency, Hall added.
“We expect negative to low real rates to continue for another six months,” Hall wrote.
“The close link between the US-dollar-to-euro exchange rate has been the central theme to the gold-price forecasting for three-and-a-half years, since September 11 2001. This relationship has, however, evaporated when the French said ‘no’ to the European Constitution in May 2005,” Hall added.
“There appears to be a material deviation on apparent US dollar strength (or euro weakness) as the gold price finds strength from physical demand, inflation fears and gold as a currency,” Hall wrote.
“In early January, when everyone is back in their seats, gold is likely to move above $500/oz and at least test the recent high of $540/oz. During 2006, gold could trade in a range between $480/oz and $570/oz,” a Switzerland-based trader said.
During 2006, the price of gold is likely to be boosted by investment demand, inflation concerns, a weakening of the dollar and increased central-bank buying of gold for reserve holdings, he added. — I-Net Bridge