GFMS presages gold at $461/ounce

GFMS Ltd, the London-based precious metals consultancy group, has indicated that international gold prices is likely to average $461 per troy ounce in 2005.

Silver, platinum and palladium would average to $6.79, $860 and $199 per troy ounce, respectively. It said the yellow metal would typically range between $416 and $503 an ounce in 2005, while silver is likely to swing between $6.26 and $8.40.

Platinum will range between $785 and $970 and palladium between $163 and $268. "As in 2004, external economic developments look set to be the dominant influences on the gold price this year. The dollar is set to fall further until there is a clear and sustainable reduction underway in the US fiscal and current account deficits. Similarly, euro and yen short-term interest rates are not expected to be large enough to provide investors with attractive real returns, the thirst for "alternative assets" therefore would grow. Gold, as a result should be an important beneficiary," the report said.

Silver will face two opposite forces in 2005.

"The first would be a negative impact of weaker fabrication demand due to a downturn in global industrial production growth eventually hitting industrial offtake. Against this, the positive effect would be of continued buoyancy in speculative demand for the metal, which was likely to be sufficient to overcome the negative force, especially if silver catches a ride on gold's coat tails," the firm thinks.

The platinum market is expected to record a modest surplus in 2005.

Higher supply from mine production and auto catalyst scrap plus a further, though smaller compared to 2004, slide in jewellery demand will bring about most of the deterioration in supply and demand fundamentals.

This is expected to flow into 2006. This would be because of the strength of the South African rand, which was dampening expectations of future growth in mine production from that country.

Second, auto catalyst demand would stagnate owing to increased sale of diesel engine vehicles which do not use catalytic converters.

Third, the positive effect of higher gold prices will pull up platinum given the strong correlation between the two metals. It is probable that platinum will benefit from a strong rise in gold.

For palladium, supply should be swollen by other stocks, mainly of Russian origin. Mine production is also slated to grow, albeit at a slower pace than once expected.

On the demand side, the boost in 2004 from Chinese purchases of palladium jewellery is unlikely to be sustained this year. Further, substitution of platinum in gasoline auto catalysts would give a substantial boost to demand seems to have been dashed.

Speculative fund purchases on dips, influenced by the huge platinum-palladium spread, should, however, prevent a free fall in palladium prices in 2005.