December 12, 2004
By Kathryn Cooper
UK Times

THE gold price could surge to a 20-year high of $500 next year, despite a sell-off last week.

The precious metal was at $434 an ounce on Friday — 4% off the 16-year high of nearly $453 that it reached at the end of last month.

However, more than two-thirds of analysts polled by Reuters, the data firm, predicted that the price could rebound to $500 in 2005 — 15% above current levels and the highest for about 20 years.

Investors have rushed to buy gold this year as an alternative to the ailing dollar. The American currency has weakened by 9% against the pound over the past 12 months; gold is up 7% over the same period and 70% above its low of $253 in 1999.

Gordon Brown, the Chancellor, sold 395 tonnes of UK gold reserves between 1999 and 2001 at an average price of only $275, costing taxpayers about £700m, according to latest official figures.

The dollar bounced back last week, sparking the sell-off in the bullion market.

But many experts think that the currency will resume its slide over the longer term because of America’s $660 billion (£346 billion) trade gap. The country imports more than it exports, which puts pressure on the dollar.

Ross Norman of The Bullion Desk, an analyst, said: “We think it is a good bet that gold will retrace its 16-year high early next year. It could even go as high as $575 if, as we expect, the dollar continues to weaken and demand from investors picks up.”

He said that the supply of the precious metal from countries such as South Africa was static, while demand from investors was taking off. For example, a gold fund that listed on the New York Stock Exchange last month took $1.3 billion in its first three days.

Paul Merrick of RBC Capital Partners, an investment bank, is also bullish about the gold price in the long term. He said: “The gold price has been weak recently because the dollar has been strong, prompting bullion investors to take profits before Christmas. The price could even fall back to $420 in the short term. However, I think that it will lift off again in the new year.

“American policymakers show no sign of curbing their deficits and overseas holders of the dollar, particularly in the Far East, are getting increasingly unhappy about owning a weak currency. Gold is the obvious alternative as a store of wealth.”

He thinks that the gold price could go back up to the high $400s and could even touch $500 if the currency slides by as much as 25%.

However, Kamal Naqvi of Barclays Capital, another investment bank, predicts that the gold price will end next year at $380 — 12% below its current level.

He said: “We may well see another push towards $450 at the start of the year, but we think gold will be lower by the end of 2005, primarily because we are bullish about the dollar.

“We think that US economic growth will be strong next year, which will push interest rates up and make American assets more attractive to investors.”

Naqvi predicts that the dollar could strengthen to $1.24 against the euro next year, compared with $1.32 at present.

Other commodities, such as tin, copper and oil, have performed even better than gold this year. The price of tin has soared about 35%, following a rise of nearly 60% in 2003, according to Legal & General. The price of copper has leapt by approximately 35% both this year and last.

Commodity prices have surged because of strong demand from China. The economy is expanding by about 9% a year and the country is sucking in raw materials as it builds up its infrastructure.

Naqvi said: “We are positive on the outlook for commodities because demand is expected to remain robust, even if Chinese growth slows down.”

http://www.timesonline.co.uk/printFriendly/0,,1-529-1399377,00.html