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Historic highs in gold prices forecast

With gold investments continuing to surge, the price of the precious metal could hit an all time high of $850 per ounce.

india Updated: Apr 13, 2006 17:20 IST

With gold investments continuing to surge, the price of the precious metal could hit an all time high of $850 per ounce against the current level of over $600, say London-based global consultants GFMS Ltd.

Forecasting a historic bull-run in price, Philip Klapwijk, chairman of the independent precious metals research consultancy, said, "The possibility of a further strong increase in the gold price was a key finding of Gold Survey 2006."

"Levels safely over $600 (per ounce) are now in our sights and further hefty gains over the next year or two are quite possible -- in the right circumstances, the 1980 high of $850 could even be taken out," he said in a statement at the launch of the 38th edition of the consultancy's annual survey of the world gold market in London, Toronto and Johannesburg.

The consultancy feels the bull-run would be overwhelmingly driven by investment.

The survey says that in 2005, the rally in gold prices was due to investors' belief that central banks were becoming friendlier to gold and a phase of marked yen weakness, which boosted investment in Japan.

For 2006, the chief drivers of investment were expected to remain the high probability of a sharp slowdown in US economic growth and a slide in the dollar.

Other supportive factors are thought to include greater inflationary pressures and political tensions in the Middle East.

"The sheer success of investment to date in gold was also thought significant and certainly would not harm another dramatic possibility -- a range of new players, pension funds for example, entering the commodities market in general," the report says.

Said Klapwijk, "You're playing with fire if you ignore the weight of money argument, looking ahead into 2006. We'd only need to see a tiny slice of mainstream assets diverted into gold, which comparatively is a pretty small market, and the price could really take off."

Despite prices having risen substantially in 2005, the gold survey highlights that jewellery demand also rose by almost four per cent or 100 tonnes last year to a four-year high of almost 3,300 tonnes.

"The gains were entirely concentrated in the first and second quarters, with offtake in the July to September period little changed year-on-year. In contrast, the final three months of 2005 saw a sharp downturn in global jewellery fabrication," the report states.

On a regional basis, the consultancy noted that the gains were nearly all concentrated in the Indian subcontinent and the Middle East, which together added a little over 100 tonnes in 2005.

"However, this hides the fact that India, alone, saw its jewellery output rise by over 61 tonnes, or 11 per cent last year. As in many price sensitive markets, sharply higher fabrication during the first six months owed much to the impact of weaker first quarter prices (compared with late 2004) and the largely stable gold prices, which continued for much of the first half (of 2005)."

GFMS notes that sharply higher and volatile prices in the last three months resulted in a slump, which saw global jewellery fabrication fall during this period by over 18 per cent year-on-year.

To put this into perspective, the fourth quarter total was also more than 200 tonnes below the level achieved in the April to June period.

The report highlights that the weakness in jewellery fabrication, evident in late 2005, has continued into 2006.

This is largely due to prevailing high prices combined with increased price volatility.

Price sensitive markets have been particularly affected and GFMS notes that Turkey, the third largest manufacturer of gold jewellery, has seen a near 60 per cent year-on-year drop in its first quarter gold bullion imports.

Looking ahead to the rest of 2006, Klapwijk said, "Given that GFMS expect gold prices to rally, jewellery fabrication is likely to weaken still further."