Gold Supply Likely to Swamp Demand

An increasing surplus of bullion relative to demand could mean bad news for gold bulls, if the predictions of a new report prove accurate.

Although the supply of gold looks set to drop by 159 metric tons for 2007, demand will plummet even faster, lower by 313 tons when compared to revised estimates for the whole of 2006, according to a new study scheduled for publishing Monday morning by Fortis Bank. The report was authored by a team of analysts led by veteran gold market watcher Jessica Cross, CEO at Virtual Metals, a London-based specialty consulting firm.

Gold prices will likely fall to $580 an ounce by year-end and then to around $550 in 2007, says Matt Turner, commodities analyst at Virtual Metals and a co-author of the report. "A lot will depend on the dollar," he cautions, noting that a weaker greenback could bolster prices.

Turner's forecast compares with a spot price of $596.25 an ounce recorded Friday afternoon by the London Bullion Market Association and a multi-year high of $725.25 reached May 12. Many highly respected gold analysts who have been calling for a fall rally beyond the May high, and perhaps even above $800, may find the new report sobering.

Virtual Metals says the major factors break down as follows: increased mine output (up 21 tons) will be more than offset by lower official-sector/central banks sales (down 51 tons), lower hedging (off 12 tons) and reduced recycling (dipping 117 tons).