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GFMS Sees $700 Gold By Year-End

Simon Constable

Gold investors unnerved by the recent downdraft may just want to sit tight.

That's because investment demand could boost bullion prices to over $700 an ounce by year-end, according to the Gold Survey 2006 -- Update 1, published Thursday morning by London-based specialty consulting firm GFMS.

If the authors' predictions prove correct, gold prices will rise about 17% above Wednesday's close of $596.50 an ounce for December-dated futures. It would also place the yellow metal back into territory not seen since last spring, when the spot price hit a 26-year high of $725.25 on May 12.

Contributing factors, the GFMS report asserts, include a "bleak outlook" for the U.S. dollar due to a "problematic U.S. housing market," an "extremely volatile [Middle East] contributing to a general unease," as well as the "perceived threat of global terrorism," which should all contribute gold's allure as a safe haven.

GFMS does, however, caution that a general economic slowdown could hobble any embryonic rally if gold gets caught in a general commodities rout, and with liquidation of long positions and stop-loss selling accelerating sliding prices. The company sees a "full blown exit by investors" as very unlikely.

The exchange-traded funds that hold bullion, streetTRACKS Gold Shares(GLD - Cramer's Take - Stockpickr) and iShares Comex Gold Trust(IAU - Cramer's Take - Stockpickr), would be likely to benefit from increased investment demand, as would gold miners such as Newmont (NEM - Cramer's Take - Stockpickr), Barrick (ABX - Cramer's Take - Stockpickr) and Goldcorp (GG - Cramer's Take - Stockpickr).

The GFMS report also predicts jewelry demand will slump 19% to 2,205 tons for the year, as buyers stay home in the wake of extreme volatility and lofty prices. It says that not only price-sensitive markets such as India, which already saw jewelry buying halved in the first half vs. 2005, will be affected, but also the U.S. and Italy, where retail margins are higher.

"Until prices stabilize, we expect jewelry fabrication to remain weak," states Philip Klapwijk, executive chairman of GFMS, in prepared remarks.

Countering the reduced demand, supply of mined gold remained roughly stable, declining less than 2% during the first half of 2006. Lower production in Indonesia and Australia were partially offset by increases in Latin America.

Future supply is likely to pick up as higher metal prices spur the development of new projects. "An abundance of mines under construction," should come on line in the medium term relieving any shortages," according to the report.

GFMS also notes that selling by the "official sector" or central banks, was down 60% during the first six months of the year, and that may accelerate projected fourth-quarter 2006 sales.

That process may already have started with European Central Bank sales last week hitting about 114 million euros, or 7.5 tons, vs. a value of 28 million euros the previous period, as reported here.