Gold Prices Seen Rising on Falling Dollar, Rising World Demand
London, Sept. 25 (Bloomberg) -- Gold prices could rally in the coming weeks as the dollar weakens, demand increases in Asia and concern mounts about a declining U.S. stock market, analysts said in a Bloomberg survey.
Gold gained 5.6 percent this week, reaching $269.55 an ounce, its biggest weekly gain for almost a decade, after investors snapped up 25 metric tons of Bank of England gold and kept buying bullion until the end of the week. ``You have a combination of factors that have been bubbling away which should have produced a trading rally earlier,' said Larry Kaplan, an analyst at Flemings Global Mining Group. ``But the rally was put on ice pending the BOE auction, and that was simply the catalyst to allow all these to come through.'
Gold prices have dropped by a third in the past three years as central banks, including those of Australia, Argentina and Canada, sold reserves and on traders' concern other governments would also sell. The precious metal lost its shine as a hedge against inflation, analysts said, and banks switched to other investments, such as government bonds that offer higher returns.
The price dropped to a 20-year low in July after the U.K. held the first of a series of planned auctions to sell more than half its 715 tons of gold. Yet since the second auction earlier this week, gold has risen almost $15, or 5.6 percent.
Jewelers in Japan, preparing for the peak season of demand at the end of the year, have seen gold prices drop 14 percent in yen terms during the past three months as the dollar fell to its lowest level in almost four years against the yen.
`Old News'
``I feel more optimistic now than I have for two or three years,' said David Kovarsky, finance director at Western Areas Ltd. and Randfontein Estates Ltd., two of South Africa's biggest gold companies. ``The shocks that have been absorbed by the market, to me, are old news now.'
Gold purchasing worldwide rose 16 percent to 809 tons during the second quarter of this year, according to a report last month by the producer-funded World Gold Council. The increase was led by an 87 percent surge in Japanese demand, while purchases in Southeast Asia and Korea tripled, the council said. ``There is no doubt the Far East market has started to come back and consumer confidence is getting better,' said John Sutcliffe, finance director of Abbeycrest Plc, the U.K.'s biggest jewelry maker. ``People think gold's at the point of turning.'
Middle East demand is being helped by rising oil prices, which have more than doubled this year. Gold demand in the Middle East rose 8 percent to 121 tons in the second quarter, the WGC estimated. ``In the past as the price of oil went up, the price of gold rose,' said Sutcliffe. ``Rising Middle East incomes are positive for gold.' A recovering economy in India, the world's biggest buyer of gold, is also boosting demand, the council said.
Past Glory
While gold has largely lost its role as a haven from declining stocks and bonds, analysts said, the metal may benefit should U.S. markets extend their one-month drop. This week alone, the Dow Jones Industrial Average fell 5 percent to its lowest level in almost six months. ``I suspect the weakening of the equities has not really had any impact so far,' said Kamal Naqvi, an analyst at Macquarie Bank. ``But if it's far more dramatic then we might see it.'
To be sure, a definitive turnaround in the fortunes of gold is far from certain. Prices could still come under pressure next year because of concern over further sales by central banks of some of their reserves.
The Bank of England is still planning to carry out auctions of its gold during the next five years, while the Swiss National Bank has announced sales of 1,300 tons of gold -- half of the world's mine output -- beginning in the spring.
As a result, gold mining companies, some of whom are losing money because of low prices, may rush to sell metal to lock in prices for their output, a process known as hedging. ``The concern must be that when this rally does die out, then producer selling reasserts itself and we see a quick loss,' said Naqvi.
INDIVIDUAL ESTIMATES
Firm 1999 2000 ==== ==== ==== Kevin Norrish/Barclays Capital $275 $295 Kamal Naqvi/Macquarie Equities $270 $260 Peter Richardson/Deutsche Bank $273 $280 Ted Arnold/Prudential Bache $271 $250 Larry Kaplan/Flemings $272 $275
Average $272.2 $272.0
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