gold set to hit $1600 per ounce

Neil Dowling

October 03, 2009 06:00pm

GOLD is set to hit $1600 an ounce in the next six to 18 months, according to producers.
In a month when the metal hit more than $US1000 an ounce, the head of the world's fourth biggest gold producer said it could soar to $US1600 _ with some tipping an all-time high of $US2200.

The chief executive of South Africa's Gold Fields, the world's No.4 gold producer, said his prediction of $US1600 an ounce was tied directly to the oil price.
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``Some people say oil is going up to $US100 a barrel in the next six to 18 months,'' Nick Holland said at this month's Denver Gold Forum.

``If that's true, and if you look at the long-term relationship between gold and oil, you should find that gold would go to $US1500 to $US1600.''

It's all possible, says ABN AMRO Morgan's Aaron Ross-Connolly, who has his sell mark right down at $US850.

``I think gold will be a reliable investment over the next few years, but I think it's unlikely to climb to $US1600 unless there are big changes in the global financial markets,'' he said. ``You need an extreme situation where demand is pushed by tough economic times that can include a major financial crisis and/or hyper-inflation. I believe the metal will trade sideways for quite a while.''

In a review of the metal, the Royal Bank of Scotland confirmed that gold was a ``good store of value during financial crisis'' and advises investor is to have some exposure.

But it says it has not changed its forecast price which, for 2010, is about $US1000 _ its current level.

That suits WA miners. The Association of Mining and Exploration Companies' chief, Simon Bennison, said gold producers had a ``very optimistic' outlook over the next 12 to 18 months.

``It's very encouraging for companies who want to raise capital,'' he said.

Mr Bennison said the euphoria was tinged by the strong Australian currency, which was pushing up costs, and the potential explosion of the labour market caused by the forthcoming Gorgon gas field.

``Oil and gas is taking off and there is concern about the implications for gold miners getting and securing labour, and the resulting rise in costs.''

It is one of the factors affecting gold's sometimes erratic price movements. The reason for its volatility is that it has always been under attack from significant and disparate market forces.

It is in demand for industry (electronics and medical) as well as being an emotional purchase (jewellery), and for investment (bullion) and for collectors (coins).

Gold is often used as a hedge against inflation and because of that, oil and gold typically move in the same direction.

It is also affected seasonally _ the northern winter has reduced demand for jewellery _ and cultural movements, as evidenced by the second and third quarters, which are traditionally quiet because of a lack of mid-year festivals and weddings, particularly in India.

Unlike silver _ which for industry is rarely retrieved _ gold is heavily recycled. If scrap gold fulfills market demand then it is unlikely the gold price will rise and that may dampen prospects of companies expanding exploration and production.

The Royal Bank of Scotland report on gold said total mine production was expected to rise only 1 per cent this year to about 2450 tonnes. Australia's contribution would be about 230 tonnes.