/ 19 December 2007

Gold to end higher for seventh year running

Gold is on course to close 2007 at least $100 higher, setting the yellow 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 an ounce 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 at in April 2001.

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

What gold’s rise since the 1970s proves is that while the yellow metal may not be as cyclical as other commodities, it is vulnerable to occasional violent shakeouts -‒ 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 2007, 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 subprime crisis and the ongoing risk of a US recession have backed the flight to safe-haven investments like gold.

Inflationary pressures and geopolitical instability have further fanned the flames.

And analysts are saying that the factors that have supported gold’s upward trend are likely to remain unchanged in the medium term, despite the short-term gyrations.

“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,” said Dominic McCormick, chief investment officer at Australia’s Select Asset Management.

The dollar and gold generally move inversely, as gold is often seen as a hedge against inflation, and if the US Federal Reserve continues to cut interest rates, the dollar will keep falling against foreign currencies and 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 the VM Group, which believes the gold price will rise to $900/oz during 2008.

But Gold Field Mineral Services’ chairperson Philip Klapwijk has suggested that spot gold prices might even breach the psychological mark of $1 000/oz in 2008.

The major investment banks have also upgraded their forecasts for gold.

JP Morgan 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.

US economic jitters aside, JP Morgan 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 through the $800/oz level by the new year.

But in the longer term it foresaw the gold price hitting $1 050 an ounce by 2012 as dwindling supply of the precious metal combines with increased demand.

Precious metals analyst David Davis said the dynamics surrounding gold supply and demand has begun to change inexorably towards a diminishing supply of gold and increasing investment demand.

“Our studies indicate in the long term global gold production [primary supply] will begin to decline as the diminishing number of new reserves fails to compensate for dying mines,” Davis said in his note.

While Credit Suisse believes the US dollar would 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 quantum upward change in the gold price, enough to sustain a new gold price/$ equilibrium”.

The VM Group concurred, saying 2008 is likely to be “one of the most volatile for many years” with supply and demand levels already in a delicate balance.

It anticipates a supply surplus of 123 tonnes on total supply of 3,75-million ounces and total demand of nearly 3,63-million ounces in 2008.

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 consumption, ETFs and dehedging.

So it could be argued at these levels, gold still looks cheap. What is more, gold’s longer-term total returns by far exceed those of equities.

According to Fidelity Management & Research, maintaining a position in gold since November 2002 would have provided a significant boost to the returns of a diversified portfolio since gold has soared 153% in that time while stocks and bonds gained only 73% and 26% respectively. – I-Net Bridge