The Hindu Business Line : Gold may decline towards year-end

GOLD price forecast has always been a tricky affair. Not surprisingly, the bullish price forecast made by the reputed precious metals consultancy, GFMS Ltd, has evoked contrarian views from experts.

In its latest Gold Survey update issued earlier this week, the London-based consultancy said that prices are set to rise modestly in the second half of the year to an average of $407 an ounce.

This effectively means that the price will average $414/oz from now on until the end of the year (first-half average was $400/oz).

Expressing a contrary view, Mr Kamal Naqvi, a well-known precious metals analyst, said prices might average around $397/oz over the second half of 2004 and may be testing towards $370/oz by the end of the year because of a positive outlook for the macro-economy and a steady US dollar.

Interestingly, while the survey sees investor activity being sidelined until after the US Presidential election when dollar concerns are expected to trigger another surge in gold investment, Mr Naqvi said there was an upside potential until the US Presidential elections due to macro-economic uncertainty, dollar concerns, threat of terrorist attack, high crude oil prices and the rumoured start of the US exchange-traded gold fund.

However, after the election, prices are expected to test lower towards the end of the year, he added.

"The physical market has a distant and secondary influence on gold prices and its effect is at best neutral."

Analysing the demand-supply situation, the analyst said out that physical supply is likely to exceed physical demand by around 155 tonnes in the second half of the year, which was unlikely to push prices higher.

The chief risk to gold prices, up or down, is a sudden change in investment demand. The consultancy believes that long-term investors worried about the dollar, together with fabrication demand, will hold gold prices above $390/oz.

"On the contrary, our fear is that long-term investors have either already left the gold market or continue to wait for much more to occur. In our view, prices are largely holding current levels due to speculators using gold as an insurance against currency uncertainty, and hence, we see risks to the downside," Mr Naqvi said.