The Hindu Business Line : Gold likely to decline to $350 level

MOST of the wide-range of important gold market specific and general factors that started and fuelled the rally in the yellow metal have weakened as a support for gold; and the metal is now left dependent upon the movements of the euro.

With scope for the euro to appreciate to 1.33 against the dollar over the next three months, one last leg higher in gold prices is possible. However, a recovery of the dollar back to 1.18 by the end of the year is seen.

Therefore, in the absence of any other supporting factors, gold prices are expected to correct back towards $350 an ounce over the same period.

Speaking at a mining conference held earlier this month in Canada, Mr Kamal Naqvi, precious metals analyst with Barclays Capital, asserted that many of the supposedly bullish themes for the gold market are overdone, unproven or wrong; but this does not mean there would be collapse in prices below $ 300/oz.

"However, a consensus economic view (that is, robust world economic growth) is likely to see gold prices come under increasing pressure," he cautioned.

Demand for gold will continue to trend flat to lower notwithstanding large income increases projected for China as income spend on gold in that country is expected to continue to decline.

On the impact of stagnating mine output, the expert pointed out it may be reasonable to conclude that a fall in the mine output was imminent because of decline in exploration spending during the 1990s and expected depletion in several major ore bodies in the coming years.

But a market significant fall was unlikely because of potential and current activity in countries such as China and Russia, Mr Naqvi pointed out, adding that the current level of prices and availability of equity and debt finance for project development would help accelerate mining activity.

On the theme that Asian central banks will look to substitute their massive and growing reserves of dollar denominated assets for gold, the analyst pointed out that the possibility now appears to have been dashed by the announcement of the renewal of the European central bank gold agreement.

On the other hand, gold can play a role as a `tactical' or `insurance' investment, Mr Naqvi said, adding that the recovery in prices has seen the metal return to the radar screen of investors.

"Over an extended period gold has proved itself to be an impressive hedge against inflation spikes and has outperformed most other commodities. We see this as gold's strongest argument as a tactical or insurance investment," he remarked.