gold to reach $470 - average $437 first half 2004

Gold slump seen as a temporary weakness
Drops US$13.70 an ounce: But expected to snap back to US$470 by June

Drew Hasselback
Financial Post


January 16, 2004





A surging U.S. dollar resulted in a big drop in the price of gold yesterday, but two separate industry reports predict bullion will bounce back and fetch at least US$450 an ounce by mid-year.

Gold dropped US$13.70 to US$408.70 an ounce on the Comex division of the New York Mercantile Exchange yesterday.

The cause of the deep decline was a sharp rebound in the U.S. dollar against the Euro. Gold is traded in U.S. dollars, so a rise in the greenback makes bullion more expensive to overseas buyers.

The slump sent mining shares tumbling. The Philadelphia Stock Exchange gold and silver index, an industry benchmark whose 12 members include Canadian gold giants Barrick Gold Corp. and Placer Dome Inc., fell 4% to close at 97.34 points.

Despite the correction, industry analysts expect gold to remain a hot property during the first half of 2004.

A report from London-based Barclays Capital predicts gold will probably hit US$470 an ounce before June 30. Barclays expects the price of bullion to average US$420 an ounce for the entire year.

"The rally in gold has been increasingly fuelled by the depreciating [U.S.] dollar," said Kamal Naqvi, Barclays Capital's precious-metals analyst. "Over the course of 2004, the risks are biased to the downside, with the potential for dollar recovery."

A second report, this one from London-based gold market consultants GFMS Ltd., predicts the price of bullion will surpass US$450 an ounce by June 30.

GFMS predicts the volatile swings along the way and expects the price of bullion to average US$437 an ounce over the first six months of 2004.

Philip Klapwijk, managing director of GFMS, said short-term market speculators, the unrest in Iraq, and the drop in the U.S. dollar last year contributed to a big jump in the gold price. Gold rose 20% during 2003.

Mr. Klapwijk added that the thing to watch this year is whether longer-term investors will embrace investments in bullion. "Alternative investments certainly remain in vogue and we think gold will pick up from these portfolio diversification moves."

Production supply and industrial demand -- the usual forces behind commodity price movements -- will have less impact on the gold price, even though about three quarters of the world's annual gold supply is consumed by jewelry makers.

The jewelry sector had a "grim" 2003, with demand dropping 7.1% because of the rise in the gold price, Mr. Klapwijk said. Jewelry demand could fall a further 9% during the first half of 2004, he added.

"Rising gold prices and sluggish economic growth will continue to impact on jewelry demand. As a result, GFMS is forecasting a sharp year-on-year fall of more than 9% over the first six months," Mr. Klapwijk said.

Bruce Alway, an analyst with GFMS, yesterday told a seminar in Toronto the rising gold price will cause more miners to back away from hedging policies. Hedging is the practice of signing contracts that lock in future gold sales at fixed prices.

Miners embrace hedging when prices looks set to drop and abandon the practice when they believe prices will rise. The upward trend in prices that GFMS foresees will therefore result in more hedgebook reductions.

"This has nothing to do with hedging coming back in fashion," he said. "It's merely a function of many of them having already restructured their books."

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