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Funds to drive gold in 2006;
6 January 2006 By Atul Prakash
LONDON (Reuters) - Soaring gold prices will continue to be driven
upward by fund buying in 2006, but fundamentals like jewellery demand and stagnant mine output will play a strong supporting role, industry analysts said."It is unlikely that the physical market will suddenly assume a lead role.This means that price rises will again be strongly driven by investors,"Macquarie Research said in a report.
Hedge funds operating in the New York bullion market have invested about $20 billion in gold, which they see as a safe bet amid worries about inflation,economic growth, the dollar and geo-political tensions.Exchange traded funds hold about another $6 billion of the metal.
Leading research firms and investment banks have raised their price forecasts, saying more investors would diversify into gold to benefit from its expected strong returns.
Most estimates for gold prices in 2006 fall between $500 and $560.
Gold, which gained about 18 percent last year, spiked to a near-25-year peak of $540.90 a troy ounce in December. The metal was around $528 on Friday.
PHYSICAL SUPPORT
"The physical markets really give a threshold from which gold can go
higher," said Paul Walker, chief executive officer at precious metals
research consultancy GFMS Limited."That's a supportive factor but I don't think that's a key factor driving the dynamics of the gold market."
Mine production was expected to remain static in the next couple of
years and then start to fall due to lower ore grades mined at key operations, but fabrication demand was seen rising steadily on economic growth in key markets.
Global jewellery demand rose to about 2,800 tonnes in 2005, up 7
percent from the previous year, while mine production was up just 1.4 percent at 2,495 tonnes.
VOLATILITY
While the world's major buyers of physical gold in countries such as
China,Indonesia and India would eventually adapt to higher prices, they were likely to be discouraged by sharp price fluctuations.
Demand for gold in India, the world's largest consumer, was estimated at more than 700 tonnes in 2005, up from 643 tonnes a year earlier, excluding recycled gold. Consumption surged 57 percent to 508 tonnes in the first half of 2005, but was hit later due to volatile prices. "I don't think the question is going to be about the strong price level because to some extent the perception is gold prices are going to remain strong," said Sanjeev Agarwal, managing director for the Indian subcontinent at the World Gold Council.
"But if there is huge volatility then it can impact postponement of
purchases." Bhargava Vaidya, an Indian bullion analyst, said gold demand might rise in the country if prices stabilised and hovered in a narrow range. Much might depend on moves by central banks to buy or sell gold, which could make the world market choppy, analysts said. Central banks and other monetary institutions held about 31,000 tonnes of gold in their reserves at the end of last year and might be potential suppliers.
CHINA, MIDDLE EAST
Merrill Lynch said recently that the deregulation of the Chinese gold
market, the world's fourth-largest consumer, could lead to further
buying of gold for jewellery over the next few years. Gold demand also continued to rise in the Middle East, with Saudi Arabia and
the United Arab Emirates experiencing strong growth, it noted.
"I think gold consumption in the Middle East in terms of absolute value will grow in 2006, primarily because of tourism that is increasing day by day," said Karim Merchant, managing director of Dubai-based Pure Gold Jewellers. "Here people have started accepting the reasoning of gold price increases and are buying at every level."
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