Karvy expects gold to touch $550 per ounce next year

Crossing the mark of $470 an ounce, the yellow metal's glitter will sustain as prices are expected to touch a high of $550 (an ounce) during the next year, according to gold outlook report by Karvy Commodities.

At the lower end, overseas spot gold price is expected to fall to the $450 level, where fresh buying is expected to set in.

The upswing will remain supported following the dwindling supply vis-a-vis strong demand, weakening US dollar, possible inflation rise due to high energy prices and global terrorist concerns and political problems in the European Union, the report said.

Mining plays a vital role in determining the long-term price of the yellow metal as it is the only way by which new stocks can be added to the existing above-the-ground stocks.

South Africa is witnessing a risk of losing its status as the mecca of gold following the weakening of South African rand against the greenback causing margin squeeze, rising production costs, unfavourable labour market conditions and unfavourable political environment and levy of taxes, it added.

Karvy expects output from the top four producing countries - South Africa, United States, Australia and China - to fall. This, coupled with a possible fall in other countries, should keep the prices firm, the report said.

Further, though a minor component in the world gold supply, the sale of scrap does count with its supply over the years seeing a rise. From the first quarter of 2002 to the fourth quarter of 2004, the old gold scrap as a percentage of total supply has fluctuated from 19.8 per cent to 30.9 per cent. Also, scrap sale has been very volatile and a major source of supply in countries such as India, China.

"Scrap sale may continue to remain a dark-horse next year, particularly when we anticipate higher prices to exist. However, scrap sale may not be strong enough to dampen the prices. The old scrap sales may increase in India during the festival season during which a lot of churning of jewellery takes place," the report said.

Gold has been on its long-term upwards trajectory which it began in early 2001. This long-term move has been punctuated by short-term pullbacks offering opportunities for late entrants to join the bandwagon.

With the US economy outgrowing the league of developed nations during the last two years, the worsening of long-term structural weaknesses and the subsequent movements in the greenback, the focus has moved away from gold's use as a commodity.

However, the long-term fundamentals of the yellow metal have also undergone a significant change with the mining output falling quite steadily during the last decade coupled with an evergreen demand especially from Asia.

Further, the short-term weakness-basically profit-taking-expected in gold "is a great opportunity for the late-comers to join the great gold rally," the report said.