Gold Supply Likely to Swamp Demand

Demand will decline faster than that, however, with a rise in jewelry fabrication (up 47 tons) and electronics manufacture (higher by 31 tons), being overwhelmed by weaker ETF off-take (down 108 tons), zero central bank purchases (a decline of 100 tons) and a fall in de-hedging of 186 tons. Other uses, such as for making coins, will be approximately 3 tons higher.

The result will be an overhang, or market surplus, of 219 tons of gold compared to a revised forecast of an overall surplus of 64 tons for 2006. Virtual Metals had originally predicted an excess supply over demand of 422 tons for 2006 in March. However, higher-than-expected central bank purchases and producer de-hedging led by Barrick Gold (ABX Quote) overcame dramatically lower-than-expected jewelry demand to leave the market more in balance.

However, the supply/demand balance will be only a part of the price question. "A lot will depend on the dollar," cautions Turner, noting the fact that the price of the yellow metal is inextricably linked with that of the greenback.

Perhaps sobered by the discrepancy between the actual market supply/demand balance compared to that predicted earlier this year, the report gives the following warning: "Forecasting anything is playing hostage to fortune, not least when it comes to such an emotionally charged commodity as gold."

Still, if the supply/demand predictions are correct, the resulting excess supply could become a dead weight on the bullion market. That would push down prices of the exchange-traded funds that hold the metal, iShares Comex Gold Trust(IAU Quote) and streetTracks Gold Shares , as well as producers such as Barrick, Newmont Mining(NEM Quote) and Yamana Gold(AUY Quote).