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Monday, Dec 02, 2002

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Gold may test $300-level over next six months

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The stage where gold demand kicks in is a function of price volatility. If the decline in price is as a sustained tumble, there is a high possibility of consumers holding back purchases in anticipation of still lower prices.

MUMBAI, Dec. 1

PRODUCER buy-back is central to prevailing trends in international gold prices, the precious metal seen to shed its bullish face and test the $300/oz level over the next six months, Mr Paul Walker, CEO, Gold Field Mineral Services (GFMS), has said.

GFMS is an independent London-based research and consulting company, specialising in the analysis of the precious metals markets. Even as he pointed to a likely weakening of gold prices, Mr Walker refrained from indicating an upper price band for the metal.

Logically, as and when gold prices ease physical demand should receive a boost. But according to Mr Walker, the stage where it kicks in is a function of price volatility. If the decline in price is as a sustained tumble, there is a high possibility of consumers holding back purchases in anticipation of still lower prices.

No major change to gold supply is expected, Mr Walker remaining sceptical of reports on new Chinese deposits. Asked of improved prices reportedly enjoyed by South African gold producers, he said that was largely due to an estimated 30 per cent depreciation of the South African rand.

Physical demand for gold was weak in the first half of 2002. Mr Walker says, that state of the market continues and in the absence of a reliable recovery in investment demand, the impact on gold prices of how long producers can sustain buy-back is high. Hedge positions had influenced price in 2002 first half.

The forecast of south-bound pressure on prices is yet to be reflected in gold options, where the sentiment is still comparatively better. ``It is quite skewed. My own view is that there will come a time when producers stop covering,'' he said.

In the last 18-24 months, international hedge level in gold is estimated to have reduced to some 450 tonnes.

An explanation similar to the one in options was offered for the trend of returns from gold shares, which in the past has been superior to returns from gold itself. This is attributed in the main to the disparity in investment cycle for the two, shares typically requiring a long-term outlook extrapolated from more volatile gold prices.

While these are among negatives working against buoyant gold prices, on the upside Mr Walker pointed out that economic news from around the world was yet to indicate significant recovery, not to forget the general uncertainty element caused by the war like situation in West Asia. ``That is good for gold prices in the medium term,'' he said, adding that the potential impact of gold sale by various central banks appeared to be already factored into the metal's price.

On the Indian market, Ms Hiroo Mirchandani, Associate Director (Jewellery), World Gold Council, who was also present at the press briefing, said business had been brisk during the Diwali season. However, Mr Walker maintained that a correct assesment of Indian demand needs adequate regional data as agricultural incomes which is not easy to come by.

For example, demand in Kerala was earlier muted due to, among other reasons, the poor state of the coconut economy. Subsequent recovery in that segment should auger well for the gold business, he said.

The price of silver is projected to stay restrained — not exceeding $5/ troy oz — courtesy bearish demand caused by a dip in offtake from the photography industry, clamp on industrial demand caused by the global economic downturn and the poor performance of the high tech electronics sector.

Value of gold: As the planet's ultimate hedge against risk, gold's value is driven by the quantity of what it seeks to counter — uncertainty. As Mr Walker himself said, ``There is no such thing as intrinsic value.''

So, if the world is shaken by terrorism and fear of where or when its next strike would be, that is the right fuel for support to gold prices globally.

Gold analysts here remember well the sudden swing to prices last week — all in a day, when the Mombasa attacks occured. In this metal's world, war and economic uncertainty are first rued...then, revered.

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