The Hindu Business Line : Weakening gold prices look promising for investors

With gold prices declining to a five-week low during the weekend, investors could well be wondering where the yellow metal is headed? Analysts see opportunities for investors, but are divided in their view on how gold will behave in the next six months to one year.

According to Mr Raghavan Sundararajan of Kotak Commodities Services Ltd, gold could reach a minimum of $745 an ounce in the next six months.

But Mr Avinash Raheja, Senior Vice-President, Commtrendz, said the yellow metal could target $570-580 in the first half of the coming year.

There is an outlook that is more bullish on gold price target.

Mr Neal Ryan, Vice-President and Director of Research at Blanchard and Company Inc, in an interview to Dow Jones has projected that the yellow metal could top $850 in the first quarter of 2007.

Factors driving trend

How do these analysts support their views on gold price trend? Mr Raghavan says as per the International Monetary Fund, the US gross domestic product is expected to grow at an average 3.4 per cent in 2006 and 2.9 per cent in 2007. This is a clear indication of economic slowdown and further evidence is available from the slump in the US housing market.

"Easing inflation and slowing economy will make the Fed's decision to hike interest rates further very difficult. Lower interest rate differentials will continue to weaken the dollar, thus, stemming foreign inflows," he said. This could slow down financing trade deficit and the scenario would render it difficult to support the dollar. "Hence, firmness in gold prices is expected to continue over the next two quarters," the Kotak Commodities Services Ltd official says.

But a decline is possible if crude oil prices ease; the Chinese economy overheats leading to goods imported by US being more competitive that domestically produced ones; decline in mine production being replaced by rise in Chinese and Peru production; and reluctance of consumers buying jewellery leading to price downtrend.

Mine production

Supporting the mine production projection is the fact that gold mine production in Peru increased to 173.2 tonnes in 2004 from 134 tonnes in 2001, while Chinese output was up from 192.8 tonnes in 2001 to 217.3 tonnes in 2004. At the same time, production in Africa has slid to 614.7 tonnes in 2001 to 556.8 tonnes in 2004.

"A decrease in prices below $450 will make mining of low grade ores unviable in Africa," says Mr Raghavan.

Though crude inventories are rising, the decision of the Organisation of Petroleum Exporting Countries to cut supply could keep prices firm.

"Though the Chinese economy is showing signs of overheating, price competitiveness in goods has a long way to go," he says.

`Rally lacks conviction'

Mr Raheja, in his outlook, says gold's recent rally has been quite unconvincing and lacks conviction. "The recent uptrend is clearly under stress and the market could see a reasonable correction in the price," he says.

Fundamentally, gold's rally came out of currency play and the strengthening of other currencies against the dollar. Mr Raheja says a further upside to the Dow Jones Industrial Average could lead to the dollar reversing its losses and investors could sell everything else, including gold.

Not only gold, but even silver and base metals could be hit if this happens.

Good news for investors

But Raheja feels gold is surely one of the best investments in the coming decade. For investors, the good time to buy gold will be in the first half of next year. "We expect to see gold hitting $615 before 2006 ends and target a price in the range of $570-580 sometime in the first half of 2007. That, according to us, will be the best opportunity for investors to pile up on their gold purchases," he says.

Mr Raheja does see gold surpassing $850 an ounce but that will happen only in the next five years.

Mr Ryan's projection comes out of supply-demand imbalance and central banks selling lower amount of gold. He says the lure of the gold has not faded despite hitting recent highs and the precious metals will take the lead.

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