'Low output, high demand to drive gold prices up'

Trade Talk: Jeffrey Christian

Jeffrey Christian, managing director of CPM group, a US-based consultancy firm, feels Indian consumers' attraction to gold will continue and the Multi Commodity Exchange (MCX) will be a global leader in the gold futures. In conversation with Business Standard, he gives an insight into the gold sector. Excerpts:

Between sentiments and fundamentals, which factor do you consider more significant in forecasting gold prices?
Of course, the fundamentals, especially when forecasting gold prices. But sentiment cannot be ignored either. Fundamentals work on a long-term basis, while sentiment works hardly for a couple of sessions. Past movements of the yellow metal prices and other supporting factors such as geo-political scenario, demand, supply, etc also play a pivotal role.

What are your estimates for gold prices this year?
Lower sales by the central banks, declining mine production coupled with staggering investment demand are driving gold prices up. In 2006, gold price averaged at $606 an ounce compared with $446.42 last year. This year the price of the yellow metal is expected to average $645.

The high demand conditions are expected to continue in 2007. Investors bought a net of 46.7 million ounce of gold in 2005 and 43.5 million ounce in 2006. For the current year, the estimated purchase is likely to be 39.7 million ounce.

Though the price trend is extremely positive, a careful approach is advised. However, current volatilities in the equity markets are driving investors to buy even more gold this year than they did in 2006.

What factors have supported rising gold prices so far?
Portfolio diversification by traders, hedging against currency and inflation, assured returns and focus on savings are the primary reasons why investors and consumers invest in gold.

How long do you see the current price boom cycle continuing?
Historically, the price rise continued only 2-3 years in the last super cycle. But, this boom has entered the seventh year. If geo-political scenario undergoes sudden changes, the world economy starts slowing down or the sentiment of consumers or traders changes drastically, only then the prices may collapse.

Any estimate on the production front?
Gold mine production across the globe is expected to grow by 4 per cent to 63.8 million troy ounce as compared with 61.4 million ounce last year. Supply of secondary product is also set to increase by 4.6 per cent to 27.5 million ounce from 26.3 million ounce last year.

Industrial demand is likely to increase 2.5 per cent to 10.5 million ounce in 2007 from 10.2 million ounce last year.