Gold to retain shine in ’07 — just about

MUMBAI: Gold bugs, rejoice! Merrill Lynch has raised its gold forecasts for 2008 through 2010, citing higher jewellery and investment demand.


Merrill Lynch, the world’s third-largest securities company by market value, which had earlier predicted gold to average at $600 an ounce in 2008, is now claiming it will average at $650, a gain of more than 8%. Simultaneously, it has also raised its 2009 prediction to $625 from $600 and its 2010 forecast to $600 from $550. But what about the price next year, which was earlier predicted by the bank to average at $675? Well, there’s a bit of disappointment here. The bank has kept it unchanged.
According to the Merrill team of analysts, gold prices may be driven higher by a rebound in fabrication demand for bullion, lower central bank sales and continued growth in investment demand.


Now the question is: how true is this prediction likely to be? Let us examine it component by component. First of all, the fabrication demand, which Merrill Lynch predicts is more likely to fall than rise. If gold goes on increasing, fewer people are likely to buy jewellery.
Countries like India, where the rural population has been traditionally the chief purchasing group, are also likely to reduce their imports, as the rural folk go on becoming poorer, thanks to a deteriorating rural economy and agriculture.


Central Bank sales are also not likely to threaten the gold price. First of all, central banks are increasingly avoiding selling gold. They have begun to realise the true worth of the noble metal, its role as a hedge against inflation, and its role of providing a rock-solid foundation to any monetary system.



And even if there are some sales, they will be counter-balanced against buying by certain other central banks. For example, Argentina and other South American nations are said to be in the market regularly. Russia is also adding gold by bits and pieces to its reserves. Last but not the least, there is speculation that China may begin to do the same any time now.


There is yet another buffer from central bank sales: these sales are no longer pulling down gold prices. When, during November, 2006, the European Central Bank (ECB) sold 23 tonnes of gold, the market simply shrugged off the news.


There can be an effective meltdown in gold prices on the news of central bank sales only if the central bank in question happens to be the US Federal Reserve. That will surely have a dramatic effect on the price, but the chances of such an event taking place are remote, at least for the time being.


And finally we have investment demand, that mythical component of the gold industry which appears and disappears like an object during a magician’s performance. Investment demand has always been difficult to judge; certainly nowadays, when people in countries like India are often buying gold bars for hoarding rather than melting them to make jewellery.


However, one thing is sure: investment demand is on the rise, given the availability of funkier investment vehicles like exchange traded funds (ETFs). ETFs have added fun to gold investing. They have made moving in and out of a gold position as easy as singing in the bathroom. No wonder, within three years of their inception they are a force to reckon with. Today GLD, the most popular gold ETF, holds more than 400 tonnes of gold, much more than hundreds of countries.
So it is sure that investment demand is going to play some pleasant tricks with the price of gold.


source : DNA


 
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