Gold in the News

Forecast 2007

An Alchemist Publication
Date: March 21, 2007        

Forecast 2007 – Summary Increased market volatility has translated into increased interest in the Forecast.  This year, we’ve gathered together predictions from a record 29 contributors in gold, 25 in silver, 25 in platinum and 22 in palladium.  Broadly speaking, the contributors are all in agreement on one thing: everyone is more bullish – even the bears.  The lowest average predicted in gold – $580 – is one hundred and one dollars higher than the lowest prediction of 2006, and the average of all the averages is $117 higher year on year.  In silver, the annual average of averages rose nearly $4, from $12.570 to $12.492…. But if the contributors are united by general bullishness, there are still sharp differences of opinion about how much, when and why.  This year, $175 separates the high and low averages in gold, compared to a gap of $139 in 2006, and $83 in 2005.  Contributors in silver differ by a huge margin of $5.75 (versus $3.57 in 2006 and $1.55 in 2005).

[Selected Analysts – Gold]

Jon Bergtheil
JP Morgan Chase Bank, London

Gold
Range: $570 – $750
Average: $678

Our key assumption for 2007 is that the key cause of any weakness in the dollar will be an underperforming USA economy and that the combination of those two factors will be more detrimental to base metals than it will be to precious metals. We further believe that precious metal demand growth lags base metal demand growth in newly-emerged economies.

Given those broad drivers, for gold specifically, we believe that near-static mine supply will cause a need for increased central bank sales, which will not be forthcoming...

Jeffrey M. Christian
  CPM Group, NewYork
 
  Gold
  Range: $550 – $850
  Average: $616
 
  The gold market remains very tight on a physical basis. Mine production is not   increasing as rapidly as had been expected, due to bottlenecks in starting new   mines and expansions. These are coming on stream, but they are coming more slowly   than had been expected by the mining industry. Central bank sales meanwhile   are declining, as central banks have sold much of the gold they wish to sell.   This tightening of supply has run into investment demand that has remained high,   and risen, reaching record volumes in 2006. While investment demand may cool   somewhat in 2007, investors are expected to find enough economic and political   developments around the world to keep them interested in gold as a safe haven.

David Davis
  Credit Suisse Standard Securities, Johannesburg
 
  Gold
  Range: $600 – $725
  Average: $665
 
  Our analysis continues to indicate that gold supply will fall behind demand   over the next five years as the diminishing number of new reserves fails to   compensate for dying mines. This has been happening for some time, but until   now the effect has been masked by official sector sales and producer hedging.   However, official sector sales will likely lessen in the future and central   banks could become net buyers of gold.
 
  We believe this transition, together with our forecast of an increase in investment   demand (through ETFs and exchanges) and consumption of jewellery – China’s is   likely to increase significantly over the next ten years – and diminishing mine   supply will be the time when the supply–demand imbalance really affects the   gold price. This will trigger a quantum upward change enough to sustain a new   gold price/USD equilibrium, a process that has already begun.
 
  Some of the other major drivers, which collectively support the gold price,   are: US economic fundamentals – many commentators continue to be concerned about   the long-term health of the USD; high energy and commodity costs – these cause   inflationary pressures. The significant increase in commodity costs means high   capital sums are required to exploit mineral reserves, which is likely to deter   investors from investing in mines as project margins are squeezed; dehedging   – likely to continue to draw on supply; and geopolitical turmoil – terrorism   threats and political tensions cause short-term volatility.

James Gutman
  Goldman Sachs, London

Gold
Range: $600 – $775
Average: $700

We believe that gold has regained its historical correlation with the US dollar, and we expect a weakening dollar to support a higher gold price trend through the end of 2007.  The dollar is expected to weaken significantly in the coming months, as interest rate differentials are no longer sufficient to offset the structural imbalances, such as the current account deficit, which are creating pressure for depreciation.

Gold has historically traded in close correlation to the US dollar, reflecting its easy availability (given the large above-ground reserves held by central banks, investors, and in the form of jewellery) and relatively few industrial applications.  As a result, gold trades to a great extent based on its characteristics as a store of value and medium of exchange, thus allowing it to function as a quasicurrency with a relatively stable “equilibrium exchange rate” with a US dollar basket.

Beginning in August 2005, however, this relationship appeared to break down, as the price of gold rose sharply while the US dollar remained relatively firm.  We believe this was only a period of readjustment to a new, higher equilibrium exchange rate, as the financial markets absorbed the impact of expanded investor liquidity via the ETFs, less global net central bank selling as emerging markets (including Russia and China) showed increasing interest in building gold reserves, and stronger income growth in countries (including China, India and Japan) with a high consumer propensity to amass gold.

We believe this re-equilibration process has largely been completed.  Accordingly, we expect the price of gold in the coming months to closely track the dollar.

       

About the Forecast Contributors supply their estimates for the coming year of the high, low and average price for up to four metals: gold, platinum and palladium based on the London PM fixing and silver based on the London fixing.  Contributors also provide a brief commentary on what they see as the main influences and price trends.  A prize is awarded to the contributors whose averages have come closest to the actual averages in each metal. In the case of a tie, the prize is awarded to the closest estimate for the annual high and low.

  Gold

	Name	Company	City	High	Low	Average
1	Graf,Adam	Federated Global Investment Management Corp.	NewYork	785	620	755
2	Norman, Ross	TheBullionDesk.com	London	850	580	716
3	Reade, John	UBS Investment Bank	London	800	580	700
4	Widmer, Michael	Calyon Corporate and Investment Bank	London	800	550	700
5	Gutman, James	Goldman Sachs	London	775	600	700
6	Steel, James	HSBC Bank USA NA	NewYork	720	580	680
7	Bergtheil, Jon	JPMorgan	London	750	570	678
8	Murenbeeld, Martin	Dundee Group of Companies	Vancouver	755	565	674.50
9	Klapwijk, Philip	GFMS Ltd	London	752	602	674
10	Davis, David	Credit Suisse Standard Securities	Johannesburg	725	600	665
11	Richardson, Peter	Deutsche Bank	Sydney	720	590	660
12	England, Richard	Standard Bank	London	700	575	660
13	Panizzutti, Frederic	MKS Finance	Geneva	750	580	652
14	O'Connell, Rhona	ROC Consultancy Ltd	London	750	570	650
15	Weldon, Gregory	Weldononline.com		750	550	650
16	Tully, Edel	Mitsui Global Precious Metals	London	715	520	650
17	Jacazio, Costanza	Barclays Capital	London	730	570	645
18	Wrzesniok, Wolfgang	Heraeus Metallhandelgesellschaft m.b.H.	Hanau	730	585	645
19	Vaidya, Bhargava	BNVaidya & Assoc	Mumbai	725	550	645
20	Turnbull,Trevor	Scotia Capital	Toronto	750	575	640
21	Turner, Matthew	Virtual Metals	London	750	560	640
22	Hochreiter, Rene	James Allen	Johannesburg	750	590	620
23	Fertig, Peter	Dresdner Bank AG London Branch	London	700	540	620
24	Christian, Jeffrey	CPM Group	NewYork	850	550	616
25	Henton, Helen	Standard Chartered Bank	London	680	580	613
26	Rhodes, Jeff			730	540	610.50
27	Takai, Bob	Sumitomo Corporation	Tokyo	680	540	600
28	Biondi, Adrien	Commerzbank International SA	Luxembourg	675	505	580
29	Briggs, Stephen	SGCIB	London	675	500	580
	AVERAGES:			742.138	566.103	652.379

  Ross Norman
  TheBullionDesk.com, London
 
  Gold
  Range: $580 – $850
  Average:$716
 
  We remain manifestly bullish for gold. Over the last five years gold has notched   up a successive 23%, 25%, 5%, 20% and now a 23% rise; for 2007 we expect the   gold price to rise by a comparatively modest 18%, with a possible spike to an   all-time record high of $850. Whilst a weakening US dollar, stagnating mine   production, buoyant oil prices, ongoing geopolitical tension and the spectre   of inflation may provide a positive backdrop, we expect that sentiment will   also be supported by institutional investors demand growth arising from a broader   access to gold both across a broader geographic spectrum as well as in terms   of more products such as ETFs and bullion-linked indices. However, the fragmentation   of the gold market that follows in consequence may well lead to increasing problems   with liquidity, and thus price volatility is also expected to remain high.

Dr. Peter Richardson
  Deutsche Bank AG, Melbourne
 
  Gold
  Range: $590 – $720
  Average: $660
 
  Gold is expected to be the main beneficiary from a slowdown in US growth and   a related shift in US 11 monetary policy. Fading interest rate support for the   US dollar and declining real interest rates are expected to intensify investor   concerns over the ability the US to finance its external deficit, putting further   downward pressure on the TWI of the USD. Given the well-attested inverse relationship   between the value of the USD and USD gold prices, annual average USD gold prices   are expected to rise further following last year’s 56.0% rise to $605. At the   same time, both gold and silver are expected to continue benefiting from investment   inflows into exchange traded funds for both metals, as this new vehicle taps   into hitherto unsatisfied retail and professional investment demand for the   precious metals. With the gold/silver ratios trending lower, annual average   silver prices are expected to rise by 12.7% in 2007. We also believe the case   for robust PGM demand and prices remains firmly intact. Legislative changes   in Europe and the US are expected to drive continued growth in demand for platinum   in auto catalysts, while strong growth in Chinese automotive production is expected   to do the same in Asia. Palladium demand is also expected to benefit from the   wide price spread between platinum and palladium in the catalytic converter   and jewellery markets. Supply constraints in South Africa are likely to be price   supportive for both metals.

James Steel
  HSBC Bank USA, NewYork

Gold
Range: $580 – $720
Average: $680

Gold prices have retraced from the 2006 highs on a general correction in commodity prices and intermittent rallies in the US dollar.  Key determinants governing prices in 2007 will be world growth, US dollar levels, inflation rates, oil and other commodity prices and unpredictable geopolitical events. Income growth in the emerging world is likely to support gold demand, should prices fall below $600.  The potential for a resumption in US dollar weakness is also likely to be bullish for gold.  However, world inflation levels may not be sufficient to support sustained price hikes over $700, and commodity prices have retraced and may remain under pressure.  Unforeseen geopolitical events have the potential to influence gold to the upside, especially if they propel oil prices higher.  The prospect of limited central bank selling is also likely to be supportive for gold, as is the continued success of the ETFs.

The above information has been redacted from Forecast 2007 published by the London Bullion Market Association.

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