The Hindu Business Line : Gold may decline after US presidential polls

ALTHOUGH gold has recovered from the April retracement and is currently hovering around $400 an ounce on physical and fund support, in the short-term there are upside risks due to economic and geo-political concerns. However, prices are expected to weaken towards the end of the year.

The US economic slowdown and consequent weakening of the dollar, high crude oil prices and ongoing terrorist concerns (particularly in the run up to the US presidential election) are all combining to create an upside risk over the coming weeks.

Over this period, there will be bouts of profit taking, but few will be willing to go short and this allows a modest amount of buying interest to push prices higher, according to experts.

However, the situation has the potential to change. "We see this (the upside risk) as a temporary phase and that a recovery in global growth prospects will put gold under pressure again, particularly once the threat of terrorist attack during the US presidential election has passed," Mr Kamal Naqvi, precious metals analyst with Barclays Capital Research said.

It is believed that unlike 2003 and early 2004, sentiment towards gold is currently much more concentrated on nearby events rather than a continuation of the bull rally that began in 2001.

Barclays Capital has forecast strong global economic growth led by the US, by the end of this year and into 2005. This supports a recovery in the US dollar, particularly against the euro over the coming 12 months. "Under this scenario, gold prices will be markedly lower in 2005 until inflation becomes a larger threat," Mr Naqvi pointed out.

A surplus of gold in 2005 (total physical demand 4,080 tonnes and total demand 3,510 tonnes) is seen. Average price for the year is forecast at $350/oz. For 2006, on current reckoning, the average price is forecast at $370/oz. On the other hand, for the current year, Barclays Capital expects the average price to be $400/oz.

Silver: Strong performance of silver has been fuelled almost entirely by speculative buying. Investors looking for attractive risk-reward propositions found gold/silver ratio an excuse to take a long position in silver. Fund buying has helped prices surge, but potential exists for a marked correction given poor physical fundamentals, according to Barclays.

"In the absence of physical demand, with record-low lease rates reflecting a well-supported market and given the small size of the silver market, another sharp price correction is likely when, finally, funds look to exit their long positions," Mr Naqvi remarked.

In 2004, silver prices will average $6.40/oz while ranging between the high of $8.50/oz and low of $5.00/oz., according to Barclays Capital.

For 2005, the forecast is an average price of $5.80/oz despite a statistical deficit (total supply 27,700 tonnes and total fabrication demand 28,000 tonnes) and for 2006 average price of $5.60/oz with a deficit of 500 tonnes.

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