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Precious metals are set to extend the solid gains made in recent months, driven by rising investment demand against a backdrop of a weakening dollar and the general instability in global financial markets, said delegates at the just-concluded London Bullion Market Association annual conference here.

21 November 2007
MUMBAI (Dow Jones) -- Precious metals are set to extend the solid gains made in recent months, driven by rising investment demand against a backdrop of a weakening dollar and the general instability in global financial markets, said delegates at the just-concluded London Bullion Market Association annual conference here.

Spot gold is widely expected to break its record high of $850/troy ounce before the year is out.

Spot gold was around $803/oz around 0445 GMT Wednesday, after the metal staged a strong recovery overnight from a low of $773.10/oz.

With the possibility of a spike in gold price above $1000/oz very much on the cards sometime next year, gold could be around $845/oz by September 2008, according to an LBMA poll of delegates.

Silver prices are expected to rise to $16.30/oz, while platinum is expected to hit $1519.30 by September end. Voters said they expect palladium to be around $446/oz, a gain of almost $100/oz from current levels.

Investment demand is the single most significant factor supporting the gold price, delegates said. Of investors, macro hedge funds remain the dominant force, followed by institutional investors and retail investors.

Investment in commodities to date is seen at $118 billion, fueled by high demand for commodities globally, and aided by the securitization of commodities and increasing dominance of electronic trading platforms, said David Holmes, director of precious metals at Dresdener Bank.

"The Pandora's box has been opened ... In many respects investors have only dipped their toes in," he said.

Meanwhile, supply is unlikely to rise substantially in the near future. Most participants said they expect central banks to significantly undersell the 500-ton limit imposed by the Central Bank Gold Agreement. Only 29% of voters saw sales between 400-500 tons.

The first and second agreements have been a success, with both producers and central banks "happy" with the results, although it is early to say if the agreement will be renewed for a third five-year term when it expires in September 2009, Michael Paprotta, a senior management executive of Swiss National Bank, Switzerland's central bank said.


China, India Demand To Fuel Gold Super Cycle
Investors are attracted to commodities in general and gold in particular as a portfolio diversifier, amid ongoing credit market chaos, the weakness of the dollar, inflation concerns and perceived geopolitical tension, participants said.

This demand is seen fueling a protracted commodities super cycle.

Indeed, the true super cycle in gold is still ahead of us as China's appetite for the yellow metal gains momentum in the next five years, said Alan Heap, managing director of Citigroup.

Relative to other commodities, China's demand for gold is rising sharply as the country's demand exceeds production and hence the metal is likely to be the future winner in the commodities super cycle, Heap said.

"If we include rising demand from India, this super cycle could be extended further," he said.

Still, in India, paper investments in gold are struggling to garner the same attraction for Indian consumers as the physical metal, a senior ScotiaMocatta executive said.

"What investors are looking at is...buying gold and taking profits as and when the opportunity arises," said Rajan Venkatesh, managing director of the bank's India bullion division.

Gold now competes with a growing range of consumables such as iPods, refrigerators and cars for disposable income, Venkatesh said.

Indian gold demand is also no longer as seasonally biased toward the wedding season as it used to be, said Sunil Kashyap, Managing Director of Bank of Nova-Scotia.

"All seasons are now wedding seasons," he said.

A growing Indian middle class is resulting in demand more evenly spread through the year amid rising investment demand and with wedding dates no longer confined to the traditional season, Kashyap said.

There has also been a "perceptible" shift in the demographics of demand in the jewelry market as low-income groups see their disposable incomes rise, although higher income groups are turning to diamond and platinum-based jewelry, he said.


Consumer Demand Still Remains Price Sensitive
But price remains a key factor for Indian buyers.

Although appreciation in the rupee has partially cushioned the domestic jewelry market from soaring gold prices in dollar terms, the metal's recent breach of a benchmark level has deterred gold buying, the president of the Bombay Bullion Association said.

In October, spot gold prices smashed through the INR10,000/10 grams level, a factor that dragged gold sales in October down to 14 tons, from 64 tons in the same month last year, he said.

"Buyers feel comfortable to buy around INR9,500/10 grams. However, over INR10,000, they prefer waiting for corrections," he said.

Still, a growing number of younger Indians with disposable incomes to spend on mobile phones, personal computers and cars will also spend on gold and will help ensure steady demand for platinum group metals, said Mitsubishi Corp. analyst Tom Kendall.

"We see the country becoming an increasingly important center for the PGM (platinum group metals) industry, not only for primary demand from the autocatalyst, electronics, petrochemical and other industrial sectors, but also as a growing hub of secondary PGM material flows and liquidity," Kendall said.

Similarly, gold buyers in China are "spoiled for choice" as international and domestic brands vie to make a name in the fast-growing market, a senior World Gold Council Executive said.

China's supercharged economic growth has increased wealth in key urban centers. The result has been a young and affluent consumer base emerging in major urban centers, said Albert L.H.Cheng, WGC's managing director for Far East.

By next year, China will knock the U.S off its position as the largest consumer of gold after India, as the Chinese market grows by 10%-15% through 2008, Cheng said.

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