The Hindu Business Line : Gold has potential for fresh highs: GFMS

Outlook
Global output to recover after faltering to a 10-year low in 2006.
Further decline in demand expected this year.
Non-fundamental factors may prop prices higher.

Mumbai April 4 If sustained investment plus lower official sector sales and ongoing de-hedging were key to gold's price gains in 2006, the same factors would continue to operate in 2007 and create potential for fresh highs this year, GFMS said in its Gold Survey 2007.

Sanguine report

This edition, released in London on Wednesday, marks the 40th anniversary of the authoritative annual survey of the world gold market by the premier precious metals research and consultancy. The report is sanguine that world gold prices will rise higher in 2007 and 2008 on the back of sustained investor interest which grew markedly in 2006 and is expected to remain healthy throughout the year.

It would be no surprise if gold prices this year crossed last year's highest rate of $725 an ounce, according to GFMS Chairman. Why should prices move higher? Actual and potential dollar weakness, possibility of sharp slowdown in the US economy and the damage it would inflict on conventional asset-returns, threat of higher inflation and an escalation of geo-political tensions (most obviously as regards US action against Iran) are offered as chief explanation.

Fundamentals

On the fundamental side, the survey forecast that global gold output would recover in 2007 after faltering to a 10-year low (fell by 3 per cent) in 2006. On the demand side, its was conceded that world jewellery demand fell 16 per cent in 2006; a further decline is expected this year too. In addition, bullion imports into West Asia fell by close to 50 per cent last year; further weakness is likely this year.

Mine output

Clearly, fundamental factors - rising mine output and faltering demand - are largely not supportive of higher prices. However, GFMS is betting on non-fundamental factors to prop prices higher. Role of funds is becoming increasingly critical.

If the price expectations come true, it would once again confirm the yellow metal's oft-repeated status as a safe-haven investment and hedge against inflation.

Growth potential

In price conscious markets such as India, consumers resent high and volatile prices. The growth potential of the Indian market is further stymied by extremely modest rise in rural incomes as agricultural growth has left much to be desired.

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