Confusing is what I call it! I had a good grumble to Isabel about it. This business of forecasting in averages is not helpful to your normal punter. Here are Isabel and I, avidly reading up on what the experts predict for gold in 2008, and it’s as good as gobbledygook. We don’t buy or sell gold on an average, for dickens sake! What we want is a price forecast range!
Still, the message coming over is that gold is going to go up again, so we are not of a mind to complain too much. The price closed 2007 within just nudging distance - $15 an ounce - of its past all-time high of $850, and promptly jumped to $860 in the first week of 2008.
Can 2008 bring more jumps like that? Gold has had a good six year run, the longest in its history. We have been doing our holiday homework, having a good root around to see. What’s coming up is not of the same magnitude as 2007 — yet. That average for 2007 was $696, and the forecast for 2008 is $800. (To be fair to the averagers, mining companies also quote costs and production on averages. So the numbers do have their uses.)
Gold bulls believe that gold is still way undervalued. Gold was fixed at a record high of $850 in January 1980 on high inflation linked to strong oil, Soviet intervention in Afghanistan and the effects of the Iranian revolution. After adjusting for inflation, that level, they were pointing out last year, is equal to $2,079 at 2006 prices.
Top of our pops is BlackRock’s Dr. Graham Birch. He and his team run $40bn invested in natural resources, so a lot of people trust him to get it right.
$800 is not enough to replace production
Graham Birch thinks that gold may rise as by much as $100 in 2008 (yippee!). Looking at the fundamentals he thinks he could go further. Production shortages justify even more, he says, according to Bloomberg. "The price needs to be north of $1,000," he told the news agency. "$800 is not enough to reverse the gradual decline in production."
Global production output dropped last year to a 10-year low of 2,477 tons. Supplies from South Africa, the world's biggest producer, have fallen to the lowest in 84 years. Last year they declined by 7.5% as companies were forced to dig deeper and pay workers more.
At JPMorgan they agree with him. Gold "is still a positive story, because of mine supply, which continues to be highly constrained," says analyst Michael Jansen.
And another forecaster has its eye on a second shrinking source of supply. Restrictions on sales by central banks, the biggest holders, look likely according to Fortis & VM Group. They predict that those sales may slow — they were around 495 tons in 2007, down from 583 tons in 2006. Even fewer sales are predicted for 2008.
Investment demand is due to jump
A changing flow, noted by James Moore at TheBullionDesk.com, is investment money. Lack of other viable alternative investments to dollar exposures is likely to bring interest in gold investments.
"There is going to be some reallocation of money next year and certainly gold is going to get a favour," he told Reuters. "We are looking for a test of $850 very early in 2008. All the supportive factors are still there. The dollar is very much under pressure and we have got geopolitical tension."
Investment demand for gold could jump to 500 tons — around $13 billion-worth - compared with 384 tons last year, according to Philip Klapwijk. He is chairman of London-based research company GFMS.
Then, at last, I found a range! Skimming through the Bombay Business Line I read an interview with Paul Walker, CEO of GFMS. Another believer in an $800 average, he sees the price going towards $900 in the next six months.
A $1,000-$750 range?
But with nice clarification he added: "If the sub-prime crisis becomes manifest, $1,000 an ounce price of gold is yet not ruled out. On the downside $750-760 is where the low will be. The mid $800 is also a potential average price for gold in 2008. Although, the downside risk is limited with only $40-50 dip in price. There is a bigger chance in our view of higher prices than lower prices." The floor, he says, will be created by Indian physical demand, and set at around $750.
What is behind all this confidence? According to Deutsche Bank it is "record high oil prices, credit market turmoil, falling US interest rates and geopolitical tension." The assassination of opposition leader Benazir Bhutto in Pakistan has only increased unrest. That has increased gold’s safe-haven appeal.
In the past days, the metal has gained on speculative buying driven by dollar weakness. The dollar put in its worst performance in four years in 2007. A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand.
The metal is also generally seen as a hedge against oil-led inflation. And, of course, the oil price has hit record levels.
Then there are the credit crisis horrors that keep on crashing into the news. The banks’ multi-billion write-offs continue to be really frightening. GFMS’s Walker believes that "there is a lot of toxic stuff out there that will have to eventually work its way through the system." That he believes is a four or five-year job.
So events could create a very positive investment and supply position for gold for some time to come, he says.
Still, markets are never without a contrarian. Goldman Sachs International economist James Gutman, who had a good record last year, has been bearish. He put out a figure $790 in six months and $750 in 12 months. "As the U.S. dollar gains strength once again, the price of gold will, in turn, likely decline," he said last month.
Overall, however, it looks as though Isabel and I will be taking a plunge!
Keep trading,
Erin and Isabel
