Physical demand, funds to dictate Q2-3 gold price: Virtual Metals

London (Platts)--3Apr2006

Pressurizing bullion to multi-year highs, fund investment has seen the
levels of physical demand slump, research from Virtual Metals on behalf of
Fortis Bank suggests that the actions of the funds and the physical players
are key to the performance of the bullion market in the coming six months.
"Our sense is that a correction down to the $520-$540/oz range could see
physical buying resume and the flows of scrap back to the refineries taper
off. The longer prices remain at current levels, the greater the acceptance of
these trading ranges by the price sensitive sectors and more they become
accustomed to operating in these price environments," said Jessica Cross, CEO
of the VM Group. "The real imponderable is what the hedge funds and pension
funds perceive to be the macro-economic background to global issues in the
next few months. What, if anything, will trigger a decision on their part to
reassess the allocation of their portfolios and what that might mean for the
gold price?" Cross questioned.
Should the gold price remain at current levels, Virtual Metals predicts
that the international gold market will swing to a surplus of 422 mt in 2006
from a deficit of 310 mt in 2005. Jewelry demand especially in India and the
Middle East, has been the particularly affected by the price surge and at
current levels is likely to fall by 30% to total 1,058 mt in 2006 over the
previous year 1,502 mt.
Virtual Metals also forecasts a 12% dip in North America and Europe
Jewelry demand, suggesting the market should anticipate a 21% contraction in
overall jewelry offtake in 2006 to a forecast 2,341 mt compared with 2,954
mt in 2005.
Virtual Metals also noted that exchange traded funds is expected to
consolidate at 173 mt in 2006, 10% lower than 2005 at 192 mt. The gold market
is likely to swing into surplus and the gold price will consequently become
increasingly dependent on continued investment support in the form of hedge
funds, pension funds and retail investors, the report suggested.
James O'Connell, james_oconnell@platts.com

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