The Hindu Business Line : Gold appears to be bullish

Gold prices could top $800 an ounce in the next 12 months but on the downside it may not fall below $550 an ounce, analysts told a conference on prospects of bullion here during the weekend.

A variety of factors are seen imparting bullishness to gold, according to Mr Kushal Thaker of Commodity Futures and Investors.

Holding Back

The first factor to impart buoyancy in gold is that South Africa has begun to hold back gold. "South African miners are expecting prices to rise further and that is why they are holding back their production," Mr Thaker said.

On the other hand, the European Central Banks are yet to fulfil their quota of selling 500 tonnes of gold this year as per the Washington Agreement. Under the pact, the banks have agreed not to sell more than 500 tonnes of gold a year. These banks have not sold since they too are looking for better prices.

According to analysts, against an annual demand of 2,250 tonnes, the supply is only 2,000 tonnes. The other factor imparting bullishness in gold is that miners have to to dig deep for gold.

For every 100 metre they dig, the production costs are rising by $20 an ounce.

Currently, the fair value of gold production cost is seen as $400-405 an ounce. This, according to Mr Thaker, could form as the support price for gold. China has now become another source of gold buoyancy. Beijing, which has 500-600 tonnes of gold reserves, has said it plans to quadruple its reserves.

Earlier, the US dollar made up 80 per cent of China's bank reserves and it has now been pruned to 40 per cent. The euro makes up 40 per cent and gold the rest.

Good support

Meanwhile, two mines have closed in South Africa, while Barrick has stated that it would increase its de-hedging of gold.

These could prove a good support for gold prices. On the other hand, if the US trade deficit crosses $1 billion, then there could be a major problem with its currency.

That could force US banks to pick up gold. Is there a chance of gold to decline? Yes, if the European Central Banks sell. But even then, there would be a limit.

So, what should be the strategy with regard to gold. Mr Thaker says as an investor, his strategy would be to buy at every dip. Dips are likely to be witnessed now and then.