Gold price will surge to a record high of $900/oz, driven by a weaker US dollar and economic turmoil in 2008, while a surplus in the metal will narrow by 97 tonnes, possibly dipping into a deficit, keeping prices strong, according to the VM Group/Fortis bi-annual The Yellow Book.
"We argue that although a recovery in the dollar is not impossible, and when it does come is likely to take us all by surprise, it won't be in 2008," Jessica Cross, CEO of VM Group wrote in the report.
US interest rates will drop to three percent by the end of next year as the Federal Reserve takes measures to avoid a recession, taking the dollar to fresh lows against other currencies, she argued.
If price doesn't rise to $900/oz it will be a great surprise"Such an interest rate cut may not in itself be sufficient to prevent a recession, which will see equity prices weaken. Gold could therefore benefit from this .double whammy: lower interest rates and a rush from equities," she said.
"If the price does not rise to $900/oz some time in 2008 it will be a great surprise, and if the background macro-economic picture in the US and a weaker dollar prevails and gold fails to hit $900/oz, it will be a strong indicator that gold has reached a new historic ceiling," she said.
Mine supply is not expected to change materially in 2008 because many expansions and new projects will come after next year.
The Yellow Book forecast gold-backed exchange-traded funds will hold in excess of 1,000 tonnes of gold in 2008 and possibly more if new similar products are launched in the Middle
East and Asia. Over the last three years, ETFs have absorbed 200 tonnes of gold a year and 2008 is expected to be of the same magnitude.
Central banks within the European Gold Agreement are expected to sell less gold than the maximum limit of 500 tonnes in the EGA year ending September 2008.
"We maintain, furthermore, that China's central bank will not add to its gold reserves," Cross said.
"The amounts that would need to be purchased to make a difference would be so large as to make China a holder of gold on the European scale, and the Chinese will be aware that the Europeans have needed a sales limit in order to exit the market in an orderly fashion."
Dehedging by gold producers will slow from this year's forecast 400 tonnes, which is fractionally below the level set in 2006, to about 210 tonnes.
"Yet the risks are on the side of higher dehedging, the success so far of what in effect is a gamble on higher prices will not have been lost on companies and their shareholders and there are few signs of major new hedge programmes coming to the fore."
The gold surplus in 2008 will narrow to 123 tonnes in 2008 from this year's 22 tonnes.
"We expect the physical market to record a small surplus, of 123t, suggesting that for prices to remain strong, investors need to remain faithful to bullion, which, given the background macro-economic problems relating to the probability of a US recession and a still weaker US currency, is more than likely."
Courtesy: www.miningmx.com