Will gold average $618 in 2006?

By Lindsay Williams
Business Day
Thursday, January 12, 2006

Gold is forecast to average $618 a troy ounce in 2006 - with a high of $760 an ounce, and a low of $520.75…according to UK-based consultancy TheBullionDesk….

[T]he numbers seem quite outstanding….why the sudden upgrade in your forecasts?

I suppose that if you look at the long term view of gold in the last four years we’ve had a 23%, a 25%, a 5% and a 20% increase - that’s considerable, and many of the factors that have driven gold higher over the last four years are likely to be in play in the year ahead. So we’re actually only talking in percentage terms about an increase roughly in line with what we’ve seen in recent years - many of those factors both external to the gold market, and those internal to the gold market - the supply and demand fundamentals - will continue to be very supportive.

Let’s say now we keep on banging our head up against $550 - do you think we’re going to go through there, and start going towards $600 and then get the big surge in the last part of the year?

Looking at the charts the big numbers like $550 and $600 are really only psychological numbers - from the charts perspective, and they’re important, there isn’t very much between here and $800 actually, and that’s the high we saw back in 1980.

Apart from the charts, the general momentum and bullish sentiment, is there any particular factor you think could make what some would say are outlandish predictions come true? Is it the supply side, the demand side - what’s it going to be?

The news wires tend to focus on external factors such as the prospects of a weakening US dollar, the prospects of inflation, the prospect of ongoing geopolitical tension around the world switching Iraq for Iran, the prospect that there will be fewer US rate rises during the course of 2006, the prospect that the US will continue on a sizeable trade deficit, avian flu, the non-performance of other competing assets.

The list is almost endless, but perhaps one of the more compelling - and one of the main reasons for the current gold price strength - is the strong performance from the oil price. Clearly there’s a good parallel between those two that goes back over 60 years. Traditionally the ratio between the two is roughly 13 to 1. If the gold price were to be on par with that ratio, the gold price should actually be above $800 right now - so you could either say that the oil price is overpriced, or gold is underpriced. Not unusually you get a lag when you get sharp moves in say the oil price as we currently have - so part of our thinking is based on that as well.

But moving more specifically, and closer to home, global mine production is stagnating - South Africa saw a significant fall last month of 11% year on year, and global mine production is also in decline. On the demand side we’re seeing something very unusual for the very first time - traditionally gold is extremely elastic, in other words you would traditionally see with gold price strength a tailing off in demand from certain key producers, and the gold market righting itself - gold is now more inelastic, in other words you’re actually seeing gold price buying into price strength. I don’t think that actually means we’re in a price bubble at the moment, but I think the prospects of that in 2007 are real.



The above information has been redacted from the article as it originally appeared in Business Day on January 12, 2006