The Hindu Business Line : Uncertainties can push gold to $450/oz

AS economic and political uncertainties keep stoking investor interest, gold prices in future have a strong bias to the upside, with $450 an ounce a good possibility should the conditions remain right for attracting further investor interest, GFMS Ltd has forecast.

The London-based precious metals research consultancy in its authoritative annual survey of the world gold market — Gold Survey 2004 — has said that perhaps the greatest driver of investment over the next year or so will be economic developments in the US.

The US fiscal and current account deficits, on top of rather high levels of consumer debt, create huge risk of another hefty slide in the dollar, plus eventual recession and a slump in equity markets.

In addition, instability in Iraq can contribute to conditions for a further surge in investment, GFMS remarked.

Suggesting that the key driver of last year's dramatic price rally was the inflow of investor money — financial inflows into gold were an estimated $10 billion on a net basis in 2003 — the report said the potential sums available were significantly large.

On de-hedging, GFMS forecast a rise to somewhere between 340 tonnes and 400 tonnes in 2004. Fabrication is also likely to increase after a 4-per cent fall estimated for 2003. Interestingly, although weak physical offtake slowed down the pace of price rise for a large part of the year, the brakes were taken off the price rally as price-sensitive markets got used to higher gold prices towards the end of the year.

The supply side played a lesser role in shaping prices last year. Both scrap and central bank sales grew by over 10 per cent, but these gains were largely just in response to the rally. The consultancy does not expect to see a supply shock this year undermining the anticipated rally.

Some of the statistical highlights of the supply side include global mine production which edged up just 3 tonnes from 2002 to 2,593 tonnes last year, falling short of the record of 2,621 tonnes in 2001. Official sector sales continued on recent years' growth, increasing by 11 per cent to 606 tonnes. Scrap supply rose by almost 13 per cent to a five-year high of 943 tonnes.

Key numbers on the demand side include a fall of 4 per cent in total fabrication to 3,049 tonnes largely due to a 6 per cent drop in jewellery demand as well as a decline in industrial and decorative demand and dental offtake.

De-hedging fell 29 per cent to 310 tonnes - though the second highest level ever - as a result of positive price outlook, shareholder pressure and buyback of positions inherited through merger activity.