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Dollar may dominate gold outlook Posted: Mon, 08 Jan 2007 [miningmx.com] -- STANDARD Chartered Bank (SCB) extended last week's bearish view of the oil price saying that gold would fail to push through $640/oz this year on the back of periodic dollar strength. Earlier, theBulliondesk.com, which last year was one of the few organisations to back an average gold price of higher than $600/oz, said gold would average $678/oz in 2007. The diversity of opinion is typical of gold. Helen Henton, head of commodity research at SCB said gold would peak in the first quarter of 2007 at $640/oz before softening over the remainder of the year as it struggled against periodic bouts of US dollar strength. This comes days after stronger than expected US jobs data saw the dollar climb against both the euro and the pound. Monthly payrolls data showed 167,000 jobs were created in the non-farm sector during December, far better than the expected increase of just 100,000 jobs. With the oil price having recently fallen to under $55/barrel and SCB expecting it to average around US$52/barrel during 2006, Henton said easing global inflationary pressures should reduce gold’s allure as the ultimate store of value. Henton also warned that investment flows, driven by geopolitical concerns, had proven to be transitory in nature. That would further undermine gold’s attractiveness to investors. Jobs Data The positive jobs data showed that the US economy was still performing strongly thereby tempering expecations that the US Federal Reserve would cut interest rates in the months ahead. The strong jobs data also undermined the widely held view that 2007 would be the year in which dollar finally succumbed to structural imbalances in the US economy, the most serious of which is a current account deficit of almost 7% of gross domestic product (GDP). As a result of the new found faith in the resilience of the US economy, SCB now expected the gold price to decline to $600/oz by the end of 2007 and has forecast an average price for 2007 of $613/oz. Fortunately for gold bugs, SCB forecast that 2008 would be a better year for bullion with the gold price averaging $678/oz. Henton also confirmed recently voiced sentiment from South African analysts that the greenback was still the key determinant of where gold prices were heading. “The gold outlook hinges on the US dollar as it drives investment demand,” said Henton. “After decoupling in 2005 when the US dollar strengthened, gold’s inverse relationship with the US dollar has reasserted itself with renewed currency weakness. “We expect some renewed US dollar strength beyond quarter one in 2007 as the Fed cycle turns. But the longer term outlook continues to be bearish [for the US dollar],” said Henton. “The key question is whether gold’s investment case is strong enough to withstand periodic US dollar strength, as it was in 2005, or whether it will struggle to buck the trend.” Although Henton said in the medium to long term, gold would be supported by the diversification of central bank reserves into non-dollar assets, she nonetheless warned that it was likely to occur at too gradual a pace to drive gold significantly higher in 2007. Henton said that while the bearish long-term outlook for the US dollar is supportive of the gold price in 2008 and beyond, periodic US dollar strength would weigh on the gold market in 2007. “Consumers have yet to become comfortable with gold prices above $600/oz and central bank actions are typically medium to long term in nature,” said Henton. South African gold guru Nick Goodwin, an analyst at Tlotlisa Securities (T-Sec), shared Henton’s discomfort with the $600/oz price level. “At the moment, I’m the only bear in town but I think that the gold price will fall until it hits the $550/oz mark,” said Goodwin. “Everyone’s trying to talk up gold but at the end of the day gold must be supported by jewellers and they just aren’t interested at current price levels.Free news alerts: click here to subscribe
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