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Investment demand to push up gold prices

The high investment demand for gold, witnessed since September last year, is expected to continue till 2007.

india Updated: Mar 17, 2006 15:47 IST

The high investment demand for gold, witnessed since September last year, is expected to continue till 2007, resulting in global prices of the precious metal rising to new highs, a new report stated on Friday.

The sustained wave of investment demand, which has carried gold to fresh highs and offset the slowdown in jewellery off-take is expected to continue, states the latest report from London-based metals consultancy group GFMS Ltd.

"The new money coming into the market from investors has more than offset the impact of a price driven slide in jewellery fabrication and surge in scrap supply. This is likely to be the pattern for much of the rest of this year and, probably, also in 2007," states Philip Klapwijk, executive chairman of GFMS in the latest report.

"Investors have both the capacity and the motive to drive prices to well beyond what would be justified by the normal interplay of gold's supply and demand fundamentals," states Klapwijk.

"The probability has grown that we are currently in the middle of a once in a generation rally that will take the metal to a new all time high."

World Investment (the sum of implied net investment, bar hoarding and official coin demand) more than doubled in 2005 to just over 600 tonnes.

On the price front, gold is moving towards its recent highs of $575 per ounce. It has been trading within a range of $534.20 and $575 an ounce since January.

Investment in gold is being driven by a variety of motives, including the growing crisis over Iran's alleged nuclear weapon ambitions, feel the global consultants.

Another is the outlook for the US economy and the dollar - the worsening external position of the US has raised fears of an inevitable major slide in the value of the dollar.

The only major cloud on the horizon for gold is the ongoing rise in nominal short-term interest rates. Offsetting it is the rising cost of carrying gold which is much less given the investors confidence of a double-digit gain over the short term.

When it comes to the potential capacity for investment demand, the reality is that the surface has barely been scratched given that only a fraction of the global investment in pension funds flowed into gold investment, feel the international experts.

Of the pension fund assets of $16.4 trillion at the end of 2005 in the 11 major global commodities markets, "only a tiny fraction of such institutional money has been allocated to commodities in general or gold in particular," the report points out.

"Likewise, there are around nine million high net worth individuals (with liquid assets exceeding $1 million) who collectively have even greater sums to invest."

The report points out that although from an extremely low level the number of institutional and high net worth investors in gold has risen over recent years, the absolute percentage active in gold remains tiny.

In the case of the general public, the retail investors have to date not participated to any great extent in this rally, GFMS states.

A good indication of this is the generally lacklustre demand in Europe and the US for gold bars and coins.

The report foresees ordinary investors sooner rather than later looking at gold "once the retail bandwagon really starts to roll this would signal that the rally is entering its final phase, although that point is still some way off."