The Hindu Business Line : High prices likely to dampen gold appetite

UNCERTAINTY on more than one front has helped gold make strong gains in recent times. Natural disasters, high oil prices, inflation concerns and apprehension of slowing economic growth have all fuelled interest in the yellow metal to which huge funds are now flowing.

As gold is known to be a safe haven investment and hedge against inflation, the general uncertainty is expected to help retain a healthy level of fund interest, in addition to healthy physical demand despite high prices.

However, the excessive speculative fund length is a crucial matter that cannot be ignored as it creates strong downside risk.

Large fund liquidation will emerge towards the end of 2005, in line with the view of a weaker euro and robust economic growth, Barclays Capital Research said in its latest report Commodity Refiner, adding that overall prices should remain supported at relatively high levels of around $450 an ounce.

Gold-specific factors continue to weaken — a lack of consistent inflow of funds into gold exchange traded investment products (ETFs), slower producer de-hedging, restart of central bank sales in the second year of the European Central Bank Gold Agreement and rising contango possibly encouraging project-related hedging, the report pointed out.

The first half of the year saw surprisingly strong physical demand, despite high and rising prices. With its voracious appetite for the yellow metal, Asia has been a major consumer.

Demand has, however, supported the price rather than drive it. But, reported increase in stockpiles combined with high and volatile prices could result in a slowdown in physical demand in the last quarter of the year, the report suggested.

For 2005, gold could see the high of $485/oz; and the annual average would be $439/oz, Barclays Capital said.

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