The Hindu Business Line : GFMS sees prospects for gold price to top $700

Prospects
A widespread correction could push the yellow metal market lower
Demand in India and China could be hit by higher prices
Although the buying season has already begun, offtake has been sluggish in India

Mumbai , Sept. 14

A significant amount of investor buying prompted by anticipated dollar weakness and possibility of renewed geo-political tensions could take gold prices to over $700 an ounce before the year comes to an end; but in the short-term, potential for weakness exists, according to the first update of Gold Survey 2006 released by GFMS on Thursday.

However, sounding a note of caution, the consultancy admitted that longer-term price strength was by no means guaranteed.

A widespread correction across the commodity spectrum in the wake of a possible economic slowdown in the US and China could push the yellow metal market lower. The survey does not see the rally derailed by the supply side. Scrap sales are expected to be modest because of the anticipation of higher prices (in countries like India), the report argued.

`No rally derail'

Scrap supply rose by around 50 per cent in the first half of the year, with the increase driven overwhelmingly by the gold rally.

Most of the main regions generated notably higher flows, especially West Asia, though the Indian response was relatively muted.

But, demand weakness, especially in the jewellery sector, is expected to continue into the second half of 2006. In particular, demand in price sensitive markets such as India and China could be hit by higher and volatile prices.

Severe decline

Largely as a result of higher prices and volatility, jewellery fabrication slumped by over 400 tonnes or nearly 30 per cent in the first half of 2006, the report remarked adding that though in terms excluding scrap, the decline was more severe at over 40 per cent.

The falls were greatest for the price sensitive regions of India and West Asia, but western markets' offtake was also hit as its exporters saw a fall in sales and nervous distributors shied away from purchasing.

Other fabrication rose 8 per cent in the first half, largely as gains in electronics and official coins outweighed losses for dental and other industrial & decorative demand.

According to analysts tracking the gold market, the survey's price projections are somewhat optimistic. No doubt, dollar weakness towards the end of the year is something almost everyone expects. Should it materialise, gold will benefit. However, whether the interest tightening cycle has come to an end or not is hard to tell. Some financial experts do not rule out the possibility of further rate hikes - possibly 2, going up to 3 - by the Fed that may prevent the dollar from weakening, albeit for a short period of time.

Indian buying

In the world's largest gold market India, although the buying season - marriage, festival, crop harvest - has already begun, offtake has been sluggish. Inflation is seen eroding people's purchasing power as there is serious concern about prices of essential food items.

Given the less-than-satisfactory kharif (autumn) 2006 crop prospects, rural income increases are likely to be at best modest.

In other words, fundamental factors are unlikely to attract investors to flock to gold to lead to a rally. The upward potential depends almost entirely on non-fundamental factors such as geopolitical developments, inflation and currency movements.