Pundits predict a heady 2005

IN FOCUS / GOLD

Gold prices are on the upswing again, and going by the trend it is expected to average above the $400 level in 2005 as well, owing to a weak dollar, global interest rates, producer dehedging, higher energy costs and political uncertainty.

Forecast 2005, published by the London Bullion Market Association and offering views from top bullion analysts from around the globe, has predicted a continued bull run for the yellow metal, set to average well above $400 per troy ounce.

The average price in the first week of January 2005 was at $423.42, compared with $421 in January last year. The year-on-year consensus average is up $16. The middling price of the averages provided by 25 analysts for the year is $433.61.

The optimism for gold, according to Andy Smith of Mitsui and Co. Precious Metals Inc, London, was because "consensus commandments for 2005 include an even more pear-shaped world, deeper dollar doom, more determined mine de-hedging, slacker central bank sales, price-be-damned physical demand growth, plus the miracle of levitating investment." Dollar weakness was a factor most quoted by the analysts.

Daniel Hynes of ANZ Bank, Melbourne said the US current account deficit will continue to widen and not show any sustained improvement until the second half of 2005.

He added that the increase in financing needs is expected to put further downward pressure on the dollar in the near term and with the close correlation between gold and the euro-dollar exchange rate, gold is bound to rise.

London-based CRU International's Neil Hawkes said gold is set for further, if final, price gains in 2005 after a solid performance in 2004.

The extent of the upside would be determined by the degree of dollar weakness vis-à-vis the euro. The rally will last if demand can be broadened across a wider pool of investors, in addition to speculative buying.

A net fall in the prices later in the year will be modest rather than massive.

However, Kamal Naqvi of Barclays Capital disagreed: "We expect gold to push higher in the first quarter of 2005, buoyed by a weaker dollar. We continue to forecast robust global economic growth for 2005, led by the US, and this should support a recovery in the dollar, putting increasing pressure on gold."

Jeffrey Rhodes of Standard Bank London, Dubai believes that the outlook for the dollar is mixed, with some pundits expecting a resumption of 2004's bear trend, citing the chronic trade imbalance.

Gold specific fundamentals however indicate support for the price.

Hynes of ANZ Bank said, "Mine production has almost been stagnant over the past few years. In fact, 2004 production may fall, primarily as a result of disruptions in mining at Grasberg."

According to Jon Bergtheil of JP Morgan, London, gold is also expected to benefit from the restriction of South African production, which would be caused by the strong rand.

"While China has not been as spectacular a contributor to gold demand as it has to base metal demand, we believe that this is a natural lagged effect prevalent in newly-liberalised economies with respect to spending trends on essentials versus luxury goods. We expect the year ahead to deliver accelerated Chinese demand growth," he added.

Bhargava Vaidya, B N Vaidya and Associates, Mumbai, differs with regard to the rest of Asia.

He said, "While gold prices are expected to be steady above $400, there is no likelihood of a major improvement in jewellery consumption in Asia. The Tsunami in December 2004 could be a major dampener for any demand growth in the jewellery sector in the region."

However, for India the high prices do not signal too much drop in demand.

According to Rajesh Mehta, managing director of Rajesh Exports though India is the largest consumer of gold, and the consumption has stabilised around 800 tonne a year for the last two years.

He said, "High international prices would definitely mean higher domestic prices, but this is not expected to see a drop in demand, as gold is evergreen for investors."