Gold may hit $670 in first half

Gold may touch $670 in the first half of the current calendar year, but chances of the yellow metal surpassing the recent high of $725 is distant, said Paul Walker, CEO of GFMS, at a seminar in Toronto.

He, however, was optimistic on yellow metal crossing the last year benchmark later this year, especially if the situation in the Middle East deteriorates significantly, driving oil prices higher.

Walker believes that investment would be the prime driver of any such rally, and actual and potential dollar weakness would attract investment in the yellow metal.

A slowdown in the US economy and disappointing returns in conventional assets, such as equities, should also lift gold, he Said. Walker was addressing media after releasing the Gold Survey 2006 - Update II today in London.

According to GFMS, little threat from stop loss selling or profit taking is providing the gold market with a firm underside. Jewellery demand proved very weak in the first half of 2006, chiefly as a result of the second quarter price spike, but came back fairly confidently in the second half as pent up offtake responded well to lower volatility, with buyers emerging on any price dip.

The other two significant price supports were official sector sales and old scrap. Sales by the central banks, as per GFMS estimates, halved in 2006, and are likely to remain subdued in 2007, due to signatories to the Central Bank Gold Agreement (CBGA) significantly underselling their quota.

Old scrap has been estimated to have risen by around a fifth in the first half of 2006, largely in response to the price. But this is expected to fall by around one-fifth y-o-y in the first half of the current year.

GFMS cited two fundamental reasons for price rise in 2006 "� lower mine production and de-hedging. Mine production in 2006 witnessed a modest decline of 2 per cent to 2,467 tonne. But this year, the same is expected to go slightly up, largely because of new projects' coming on stream and the already existing units ramping up their capacity.

De-hedging was thought to have been an important factor behind initial price strength last year, as the Barrick buy-back lifted the first half of 2006 total to almost 300 tonnes.

But, overall, de-hedging is expected to return to a more normal rate of under 200 tonne a year in 2007, unless fresh corporate activity brings about another shock. There is little evidence of interest in non-project hedging, despite the widening contango.