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Gold to shrug credit worries, new high beckons
Allan Seccombe
Posted: Thu, 13 Sep 2007

[miningmx.com] -- THE higher gold price around $700 should be sustained for the remainder of 2007, but there are concerns about the financial markets as investors scurry for cover from the sub-prime mortgage fallout, metals consultancy GFMS said.

The gold price will average a record $690 in the final six months of this year, GFMS chairman Philip Klapwijk said in the consultancy’s updated 2007 Gold Survey.

UBS Securities expects this year’s gold price to average $670 and $650 next year.
continued bull run towards a fresh 26-year high
Gold broke through the $700 level a quarter sooner than GFMS had anticipated, rising strongly at the end of August and into September.

“I don’t think it’ll be a problem sustaining these elevated levels,” Klapwijk said.

The fundamentals of the gold industry, continued worries about the Middle East, the largest source of the world’s crude oil, and investors re-evaluating their risk-returns, would “provide essential fuel for a continued bull run towards and eventually to a fresh 26-year high.”

Gold hit a 26-year high of $730/oz in May 2006.

“We may not be completely out of the woods as regards speculator sell-offs to raise cash or reduce leverage in our new world of sub-prime jitters, but the norm of safe-haven buying should dominate investor activity from now on,” he said.

Global stock markets took a pounding in July and August over fears that a number of banks and financial institutions faced solvency issues as high-risk property owners in the United States struggled to meet mortgage repayments amid rising interest rates and declining property values there.

“Fears of further losses in traditional investments that are highly leveraged on a problematic sub-prime mortgage market are pushing investors towards safe haven assets such as gold,” Klapwijk said.

There were "heavy" liquidations in gold positions during the second quarter of the year, which brought about a net dis-investment in the metal of 200 tonnes, which GFMS ascribed to the June bond market crisis, profit-taking and stop-loss selling. "GFMS reports there was scant evidence of any longer term investors losing confidence and instituting strategic shorts, a factor which they feel is crucial to the solidity of values moving forward."

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Another potential brake on the gold price is central bank sales, particularly by those members of the Central Bank Gold Agreement (CBGA), who are expected to sell 480 tonnes of metal this year against their agreed limit of 500 tonnes.

This is against the backdrop of low sales in 2006.

CBGA members’ gold sales will double in the second half of 2007 from the first half, Klapwijk said. “But I think much of this increase got factored into the price a while ago, maybe when we had news from the likes of the Swiss on higher sales.”

Demand for gold in jewellery manufacturing will underpin the price, although much will depend on the volatility, scale, extent and timing of such a rally in the price.

“We’d certainly factored in scope for a price rise on the back of US sub prime contagion fears, but the recent price move, which perhaps came a little sooner than we were expecting, may leave the jewellery industry with a strong sense of unease,” Klapwijk said.

Jewellery fabrication was forecast by GFMS to rise by six percent in the second half of 2007 year-on-year.

Indian and Middle Eastern buying of gold perked up considerably on a more stable gold price as well as economic growth in the first half of the year. Indian gold jewellery demand rocketed by 80% year-on-year in the first half, and 17% in the Middle East.