The Hindu Business Line : Gold may come under pressure

CONTRARY to the latest GFMS Gold Survey 2005 assertion that "gold heading for the $500-an-ounce-mark no longer looks fanciful", gold market fundamentals actually suggest a different outlook, experts said, adding that barring a very significant negative macro-economic event, gold market appears to face a much more difficult environment in 2005 than in 2004.

Gold has lost its upward momentum, gold-specific factors will be less price-positive in 2005 and a stable dollar is not sufficient for gold to hold its gains, according to Mr Kamal Naqvi, Director, Commodities Research at Barclays Capital.

Physical demand, de-hedging and new investment products are expected to be less supportive to gold this year than in 2004.

No doubt, physical demand has been remarkably resilient to higher prices, but this is cushioning prices rather than being a driver, the expert pointed out adding that the physical gold market is in a state of surplus.

In 2005, total physical supply is forecast to rise 3 per cent to 3,920 tonnes (3,804 tonnes), while total demand will be down 1.6 per cent to 3,370 tonnes (3,424 tonnes), leaving a physical implied balance of 550 tonnes which after deducting net hedging of 300 tonnes would leave an implied surplus of 250 tonnes, as compared with implied deficit of 44 (- 44) tonnes in 2004.

In this environment, any view on gold has to remain tied to the dollar movements. Barclays Capital has forecast Euro/USD to hold at around 1.30 through to end-2005. By implication, gold prices have to come under pressure as the year progresses, Mr Naqvi argued.

For 2005, Barclays Capital has forecast gold to rule at an average of $415 an ounce with a high of $470/oz and low of $350/oz.

In the second quarter, gold prices are expected to hold above $400/oz because a drop back from the March high of $446.70/oz is seen encouraging good fund buying and physical demand interest on price correction.

However, in the second half and towards the end of the year, prices can take a beating.

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