The Hindu Business Line : Gold prices may soften in H2

GOLD prices that had plummeted since peaking on April 1 as a result of a combination of factors are likely to fall further towards the end of the year because of tighter monetary policy and a firmer dollar.

While the yellow metal has a limited upside, there is a downside of as much as 10 per cent from the current levels, according to experts. What's more, 2005 may well find average gold prices declining, a reversal of the rising trend since 2001.

The end of the `reflation trade'— where investors saw commodities benefiting from low interest rates, money supply growth and a weak dollar - has greatly affected gold where the dominance of speculators completely overshadowed weak commodity fundamentals.

There is a view that gold prices would have fallen further in April had it not been for the ongoing level of geo-political concerns and the high price of oil. However, there has been a notable change in approach, with longs tending to look sell price rallies, according to Mr Kamal Naqvi, precious metals analyst with Barclays Capital.

"We see the upside for gold prices capped at $ 410/oz, but with robust support at $ 380/oz becoming increasingly vulnerable as the year continues in line with tighter monetary policy and a firmer dollar, at least against the euro; we expect to see gold trading down towards $ 350/oz by year-end," the expert said.

After averaging $ 408/oz in the first quarter, prices softened and are expected to average $ 393 in the second quarter. In the third quarter, rates are expected to decline to $ 385 and in the fourth quarter to an average of $ 375/oz.

Gold prices had been steadily climbing since 2001. From an annual average of $ 271/oz, the rate moved up to $ 310 in 2002 and further on to $ 364 in 2003. For the current year, the forecast average price is $ 390/oz, but a decline from this level appears imminent.

Experts remain largely positive on equities and on economic outlook over the course of 2004. Positive financial market performance is expected to dampen gold prices during the second half.

Barclays Capital has forecast gold prices to average $ 350 in 2005, $ 370 in 2006 and $ 380/oz in 2007.