Gold prices likely to cross $430 per ounce soon

Mumbai, Oct 24 | Updated: Oct 25 2004, 05:30am hrs
Gold is shining again. Last week, the yellow metal reached its best high since April in the global markets when it crossed $427 an ounce leading to an almost all-time high in the domestic market.

And the story is not over. Analysts and industry experts have forecast the price to cross the all essential $430 shortly.

Oil prices retreated in the last week, pulling gold back in the first part of the week, before the euro/dollar play took over the very short-term price action again. Many technical analysts are warning that an interim top is being made, before a gold prices pull back. Others are confident that the gold price will break well above $430.

Major support for COMEX December gold rests down at $423, with resistance at $428, $430 and $433, which represents a 15-year peak for futures reached back in April. With runaway oil prices and the dollar in a downtrend, investors boosted gold futures to $427.50 an ounce early on Thursday, its highest since April.

The long-term speculative position in gold dropped back to 358.1 tonne, down from 479 tonne last week, leaving what looks an increasingly solid longer-term position holding on. With the speculative shorts covering their positions vigorously, as the price moved through $419 level, perhaps the next move by the capricious speculators will be on the long side.

The physical buyers continued their strong presence in the market place and should continue to do so as the festival season warms up in India! Investors felt more convinced of their position, aided somewhat by their uncertainty over, not only the dollars prospects, but who will be the next President of the US. Apart from that, a look at the global picture shows confidence in the growth prospect, foreign exchange stability, both inflation and deflation warrants taking a sizeable position in gold. Analysts expect to see this sector of the gold market to grow in this last quarter of the year. The outlook of bullish future stems from the factors supporting gold at macro leel. These include flat mine supply, running some 95T below 2003 levels due to shortfalls at Grasberg in Indonesia and across Australia. At the same time, total cash costs rose 13% to a dismal $246 per ounce, reflecting energy prices, royalties, forex impacts, and processing of low-grade stockpiles.

Citigroup expects mine production to creep back to the 2,600 T level in 2005. Easing scrap, with sharp declines in India and East Asia reflecting a gold market becoming conditioned to prices in the $400 per ounce range. Official sector restraint, with net sales of roughly 424 T likely in 2004, down 31% to the lowest levels since Central Banks Gold Agreement (CBGA) I, was struck in 1998.

It remains unclear who will be the major sellers under the renewed CBGA II (500 TPY over 5 years), and the possibility exists that this quota will not be fully met.

After years of erosion, jewellery fabrication rose 13.7% (or 6.4% net of recycled scrap) in the first half of 2004. This reflects stronger economic growth in key gold markets, and acceptance of higher gold prices. This is likely to quicken a 15% rate in second half. Analysts expect jewellery demand to run in the 2,650 T range in 2005, still well below pre-Asian crisis peak.

After leading gold higher in 2003, investment demand has slackened sharply to 55T in 1H04. This constitutes a major opportunity, with investment demand likely to rebound sharply to at least 540 T in 2005.

According to a report by Salomon Smith Barney (SSB), their positive view on gold is largely predicated on Citigroup economists expectations for the US dollar to come under significant pressure in 2005-06 as a result of intractable dual fiscal/trade deficits. The gold price forecast is $425 and $450 for 2005-2006.