Has Gold Bottomed?
Salomon sees gold bottoming, eyes rally to $290
NEW YORK, June 21 (Reuters) - The odds that gold prices will rally soon have risen significantly, granting no more bad news about official sector sales pops up to further devastate sentiment, according to investment bank Salomon Smith Barney. In its weekly Futures Research report, received by Reuters on Monday, Salomon, a unit of Citigroup <C.N>, wrote, "We believe the fundamentals argue for a significant price bottom in the gold market, assuming that a substantial increase in gold sales by central banks does not occur."
While Salomon does not rule out further erosion in futures prices to the widely touted technical target of $250 per ounce, it said that gold prices could be subject to a correction back up to $280 per ounce and possibly to $290 -- once prices stabilize.
Gold peaked near $290 per ounce on May 7, just before Britain announced that over the next few years, it would reduce its gold reserves to 300 tonnes from 715 tonnes. The news sent gold bullion prices skidding more than $30 to a 20-year intraday low of $256.90 an ounce on June 10.
At 1140 EDT on Monday, spot gold bullion was trading at $258.90/9.40 per ounce. In futures trade on the COMEX division of the New York Mercantile Exchange, gold for August delivery fetched $260.50 per ounce.
The gold market should easily absorb the three UK auctions of 25 tonnes each scheduled through the second half of 1999, Salomon said. The first auction will be held on July 6.
"The Bank of England gold sales and the expected gold sales by the International Monetary Fund (150-300 tonnes) and Switzerland (1,300 tonnes) should be easily absorbed by the physical market, since they will be spread over a period of years," Salomon said.
The shortfall between mine and scrap supply and fabrication/investment demand should reach a record 1,000 tonnes this year, according to the report.
The prospect of this giant supply deficit, combined with likely political delays in approving both IMF and Swiss sales, an improving global economic outlook and a pullback from recent U.S. dollar strength are likely to facilitate gold's rebound.
But Salomon wrote, "Gold prices are expected to stay below $295 unless there is a significant change in market sentiment toward supply availability from the official sector."
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