Amid high volatility, yellow metal holds out a bright future

The outlook for gold hinges on the movement of dollar. The traditional inverse relationship between the yellow metal and the American currency has re-asserted itself in 2006 with the weakening of the dollar. But, the sentiment towards gold is anticipated to change next year, as the dollar is anticipated to strengthen amid striving efforts by the US to keep a check on inflation.

Industry experts remained optimistic on the future outlook of gold. An analyst at Citigroup said he expected the metal to climb above the $700 an ounce level in 2007. Merrill Lunch, on its part, has maintained its long-term gold price forecast at the $675 level for the next year.

Bhargav Vaidya of B N Vaidya & Associates said he believed the precious metal would see inflows of fresh funds only in January, as traders would sell excess stocks this month to show a healthy account for the calendar year.

Sharing Vaidya's view, Prithviraj Kothari, director, Riddhi Siddhi Bullion, and member, Bombay Bullion Association, said gold prices will range between $610 and $625 an ounce in London this month. But they would rise next month for sure, as the sentiment in the metal is bullish, he added.

The precious metal, however, remained extremely volatile in 2006 and the prices ranged between $520 and $720.

It was a golden May this year, when the prices crossed the psychological barrier and touched the 25-year high at $725 (standard gold at Rs 10,665 and pure gold at Rs 10,715) on May 12. But, the sentiment changed overnight, owing to spurt in scrap arrivals.

Even one-time consumers started frantically selling their gold to make hay while the sun shines, dealers said.

Stockists started booking profits owing to lower turnout of jewellery consumers in India, despite the wedding season, resulting in a decline in prices throughout.

Owing to higher prices, jewellery sales declined in May to roughly as low as 625 kg daily.

The prices started declining dramatically from the May highs to $582 (standard at Rs 8,800 and pure at Rs 8,845) on June 28.

The yellow metal started its upward journey again amid higher new investments from the oil-based countries, taking the price up to $649 (standard at Rs 9,810 and pure at Rs 9,860) on August 9.

This price saw another decline to $603 (standard at Rs 9,205 and pure at Rs 9,255) on October 10 due to short-selling by vested interest traders, but gained later amid fresh fund infused by countries, such as Japan and Saudi Arabia, to close the year 2006 at above $600.

The firm gold prices are mainly attributed to the US inflation woes, weak US currency, geo-political tension in the Middle East and continuing hedge fund buying. Besides, the rising crude prices also put a pressure on gold prices, which are expected to continue in future as well.

"Gold has become expensive not just for the common man, but for the elite as well. People have also stopped disposing of the metal with the hope that the prices would increase, especially in the festive season. Only those customers are coming, who are in dire need, such as for marriages or for other family functions. Otherwise, no one is buying gold and the jewellers are simply waiting for better days," an analyst said.

A section of the traders categorically affirmed 2006 as the year of speculation and predictions. China's announcement to split its foreign currency reserves of $819 billion into a number of investment options opened room for analysts to take further interest in gold.

Owing to higher realisation this year as a result of a 25-year peak price of the yellow metal, the signatories to the Central Bank Gold Agreement, mainly European central banks, completed their 500 tonne sales of gold this year.

They are permitted to sell each year under the latest five-year pact, which means the banks would set another sales target in 2007 for their signatories and push the availability from its reserves.