Gold seeks higher ground in volatile terrain
Wed Nov 21, 2007 12:57pm EST
By Atul Prakash - Analysis
MUMBAI (Reuters) - Speculative fervor in gold markets could well see prices move to record highs of $900 and beyond, but such lofty levels will be hard to sustain in the medium term as price swings get wilder.
Speculators have poured into gold, encouraged by a vogue for alternative investments against a background of dollar weakness, surging oil prices and wider concerns stemming from a global credit crunch as well as simmering geo-political tensions.
Prices rushed to their highest in 28 years at $845.50 per ounce as oil pumped towards the key $100 milestone and the dollar sank to record lows against the euro, leaving bulls to target a record $850 not seen since January 1980.
After adjusting for inflation, the record high level equates to more than $2,000 at today's prices.
But while the current key drivers of dollar weakness and surging oil are still intact, analysts say the market's heavy reliance on speculators has left it exposed to brutal change.
"It's a herd instinct. People are flooding into gold at the moment and this can change very quickly," London-based Jeremy East, global head of metals trading at Standard Chartered Bank, said on the sidelines of a global precious metals conference.
"We will probably see prices remain at higher levels for some time. But as the markets calm down and build more confidence, then people will move out of gold," he added.
Having corrected sharply from this month's 28-year peaks, gold was testing the water again at higher levels on Wednesday -- hitting an intraday high above $800.
A poll conducted by Reuters in July saw average gold prices at $670 a troy ounce, up from an average of $612.10 in 2006 and about three percent higher than the figure from a poll in January.
Some analysts saw that average climbing to a trading range of $700-$750 over the next two years.
"The current turmoil of credit crisis, dollar slide and yen carry trade issues has certainly added momentum to the phase of the gold rally, which is also preventing a massive sell off," said Dubai-based Pradeep Unni, precious metals analyst at Vision Commodities services.
"Gold could quite easily probe higher highs and even trade in four digits, but volatility may persist and could turn out to be quite normal.
VOLATILITY BITES
Analysts said extreme volatility could cap longer-term investment in gold, while higher prices could result in increased sales of metal scrap and prompt central banks to sell more of the metal.
"I think we are going to see further upside for at least another year, but at some point prices are going to come back down again...probably back to fairly substantially below the peak levels that we have just seen," said Philp Klapwijk, chairman of precious metals consultancy GFMS Ltd.
Gold's relationship with the dollar was also seen as a potential stress point for the market.
The dollar has hit successive record lows versus the euro and a basket of major rival currencies as concerns on the health of the U.S. economy and global credit markets forced the U.S. Federal Reserve to cut interest rates.
Gold often moves in the opposite direction to the dollar as a weaker U.S. currency makes the dollar-denominated metal cheaper for holders of other currencies.
The dollar sank to a record low of $1.4856 against the euro on Wednesday.
"Over the medium to longer term, the dollar is crucial in influencing gold. However, HSBC currency analysts believe the euro/dollar will average $1.45 in the fourth quarter of 2007 and the first quarter of 2008," said Jeremy Charles, global head of precious metals at HSBC bank in London.
"This implies that the dollar would support gold but would not necessarily drive it any higher. It is possible gold may spike over $850 and could even reach $900, but whether or not prices can be sustained at those levels is open to some debate."
(Reporting by Atul Prakash; Editing by Peter Blackburn)
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