May 8, 2005
By James Attwood
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--With the pendulum apparently swinging back in gold's favor, some analysts now expect the metal is back on track for US$500 sometime next year.
Confidence is building among gold traders and analysts that the widening U.S. twin deficits will keep the U.S. dollar under pressure for at least another year or two, setting the scene for gold to resume its upward trend.
Prices have climbed steadily since early 2001 as investors have sought refuge from a weakening greenback. Gold peaked late last year just below US$460 an ounce and has since returned to US$430 levels, in line with its inverted correlation with the U.S. dollar.
"The U.S. dollar looks like resuming its downtrend after this rally runs out of puff, which is positive for gold," says Euan Leckie, portfolio manager of the US$420 million Scudder Gold & Precious Metals Fund.
Gold bulls like Leckie expect the metal to hit US$475 by the end of 2005 and reach US$500 next year in a continuation of a slow upward trend.
"If we don't see prices above US$500 within 18 months we'd be more than a little surprised," he told Dow Jones Newswire in an interview.
Ellison Chu, senior trader with Standard Bank London in Hong Kong, said gold is likely to stay in the US$425-US$438 range over the medium term to finish 2005 around US$450-US460.
"I'm a bit bullish on gold because I don't think the dollar can be as strong in the second half, not just because of the deficits but because I don't think the foundation of the U.S. economy is as strong as people think," said Chu.
In New York, Comex June gold fell US$3.80 to settle at US$426.90 on Friday, off a three-week low of US$424.50 on aggressive commodity fund selling.
Sydney-based investment advisory group Fat Prophets early this month said it believes gold is in the early stage of a bull market.
"While gold remains vulnerable to additional selling pressure in the near term, we believe the longer term outlook remains overwhelmingly positive," Fat Prophets said in a note to clients.
"The fundamental backdrop for the precious metal has seldom been this supportive in our opinion. In time, we believe the price of gold will surpass the 1980 all-time high of US$850 an ounce," it said.
Non-Forex Factors Also Supportive
While gold and other precious metals continue to take their cues primarily from the U.S. dollar, market participants point to a list of other supporting factors.
Gold is more a de facto currency than a commodity, thereby largely shielding it from the anticipated slowdown in global economic growth, which has most base metals, for instance, on the back foot.
It is also seen as an inflation fighter and therefore stands to benefit from any stagflation scenario, says Leckie from Scudder Gold, who sees a possible revaluation of China's currency as potentially inflationary and therefore positive for gold.
Besides U.S. dollar strength, gold's traditional enemy is uncontrolled central bank selling, which at one point took prices down to US$250 an ounce.
But Leckie said central banks have learned their lesson and the 1999 Washington Accord affords protection from future gold de-hoarding.
Another potential threat - the proposal for the International Monetary Fund to sell some of its gold reserves to write off debt owed by poor countries - now looks unlikely to materialize with the U.S. indicating it would veto the move.
"The proposal is a concern because you have (U.K. Chancellor of the Exchequer) Gordon Brown trying to make a name for himself amongst the electorate as well as amongst people in less developed countries," said Leckie.
"But we'd expect any possible sale by the IMF, should the U.S. eventually approve, to go through the Washington Accord ...it wouldn't be an increase in annual supply of gold, rather an increase in the life of the accord," he said.
And as European central banks continue their measured selling of surplus reserves, there is very real scope for Asian countries, particularly China and Japan, to start buying gold as a way to diversify foreign reserves, Leckie said.
"We can see that at any point in time China could easily use up some of its big dollar reserves to buy gold," he said.
Analysts also point to favorable physical conditions for gold, with mine production low, producers committed to continue reducing their hedge positions under pressure from investors, and strong jewelry demand from normally price sensitive India.
The emergence of commodities of an asset class is also viewed as supportive, as is continuing geopolitical volatility and global financial imbalances.
"If we see the situation where, amid rising financial risks, people go back to automatically including gold in their portfolios then that's going to require significant new demand for gold," said Leckie.
-By James Attwood, Dow Jones Newswires; 612-8235-2965; james.attwood@dowjones.com
-Edited by Ian Pemberton
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