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Friday, September 15, 2006

Gold predicted to clamber back above $700

Gold predicted to clamber back above $700
By Chris Flood
Copyright The Financial Times Limited 2006
Published: September 15 2006 03:00 | Last updated: September 15 2006 03:00


Gold prices could clear the $700 a troy ounce level by the end of the year, driven by a return of significant investor buying, according to GFMS, the precious metals consultancy.

Gold has fallen by more than $140, or almost 20 per cent, since May when it reached a 26-year high of $730 a troy ounce, but GFMS said conditions were still right for a significant increase in investor interest as problems in the US housing market
Central bank sales of gold shrank dramatically in the first half of 2006 compared with the same period last year, declining by 60 per cent to 167 tonnes. A 500 tonne annual limit on gold sales was agreed by signatories to the Central Bank Gold Agreement (CBGA), but they had sold just 337 tonnes by the end of August.

As the quota cannot be rolled over into the next year, fears that central banks might rush to sell gold before the deadline has damped sentiment towards gold recently.

However, GFMS said it appeared unlikely that a further 163 tonnes would be released before September 26, the end of the second year of the CBGA.

Countries outside the CBGA have become net gold buyers and so total official sector sales are expected to decline by 42 per cent this calendar year to about382 tonnes.

GFMS said it was sceptical about central banks speeding up diversification offoreign exchange reserves away from the dollar and into gold.

Weaker demand for jewellery has been one of the factors behind gold's retreat since May. High and volatile prices particularly affected India where jewellery demand fell by half, while Turkey and Saudi Arabia recorded a one-third drop in fabrication in the first half of this year.

Price volatility will remain a drag and GFMS expects jewellery fabrication to fall 19 per cent to 2,205 tonnes in 2006, almost 1,100 tonnes below its 1997 record.

De-hedging by gold producers showed a three-fold increase in the first half, mainly due to significant buying by Barrick Gold after it inherited Placer Dome's book following a merger.

De-hedging is expected to slow down and the outstanding global hedge position is forecast to shrink to 1,355 tonnes by the end of the year, the lowest since 1994.

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