Global political crisis lifts gold price forecasts

By Neil Behrmann

GLOBAL precious metals traders have raised their gold price forecasts because of uncertain geopolitical conditions created by North Korea 's nuclear test.

They contend that gold's geopolitical price premium has risen because North Korea has shown Iran that the United Nations and the world's major countries have failed to prevent it from obtaining a nuclear bomb.

Gold, which peaked at US$731 an ounce in May and was down to around US$560 in recent weeks, has thus revived to around $625.

A survey of traders, analysts, precious metals refiners and funds predicts an average gold price of US$644 an ounce at the end of December. The most cautious respondent in our survey contends that gold will be US$600 an ounce; 60 per cent of respondents maintain that it will be in a range of US$650-US$675; 30 per cent say it will be between US$620 and US$640 and the remainder say around US$600 an ounce.

Geopolitics, currencies & economies

Jeffrey Christian, head of CPM Group, a precious metals consultant, believes that geopolitical events such as a crisis with Iran could lead to a 'price spike', pushing gold towards the peak of US$731 within the coming six months.

More cautious analysts agree with the view of Morgan Stanley's Stephen Roach, who maintains that a slowdown in the United States and China has already pricked the global commodity bubble.  Gold could thus be caught in a price downdraft of metals and other commodities, they warn.

The $6.5 billion natural gas derivatives losses of hedge fund Amaranth Advisors played a part in price declines in oil and encouraged speculators and investors to reduce positions in other commodities during September and early October, according to traders.

But North Korea 's nuclear test jolted markets, leading Asian and other investors to purchase gold as a 'safe haven' asset, according to dealers.

The worry is that North Korea has shown Iran that when the cards were down, the UN and major nations lost the hand. They failed to prevent it from obtaining a nuclear arsenal. Global investors will soon focus their attention on Iran , which has ambitions to become the superpower in the Middle East .

Fears have heightened in the region because General Richard Dannatt, head of the British army, said that British troops must leave Iraq 'soon', stating in effect that the allied American and British forces have effectively lost the battle to bring about peace in the strife-torn country. Fears of a civil war in Iraq and worries that Iran 's threat to wipe out Israel will bring about renewed conflict in the region could encourage Asian, European, Middle Eastern and other investors to add to their gold holdings.

Physical market

The Indian market - the single largest market for gold - has also underpinned the precious metal.

It has been particularly active because of the Hindu festival of Deepavali and the forthcoming wedding season. Outsourcing has benefited the Indian economy and a rapid growth in incomes is also boosting gold demand at prices between US$550 and US$600 an ounce, say traders.

Precious Metals Market Sentiment Monitor

US dollars an ounce

per ounce

Gold

Silver

Platinum

Palladium

3 months Forecast

 

       

High

 

675

14

1250

400

Low

 

600

11

1075

320

Average

 

644

12.5

1160

351

Median

 

650

12.5

1105

350

 

 

 

 

 

 

Market Spot

Nov 06

623

12.9

1168

319

Market 3 months

Nov 06

667

13.2

1169

324

Ten major London and New York traders, analysts, a refiner and recycling firm contributed to the survey. The predictions should not be used for investment purposes, but as a guideline on the sentiment of the market.

Gold

CRB Reuters Commodity Index

CRB Reuters Energy Index

Managed Futures Index *

Year to end October 06

17 %

12%

14%

2%

One Year Return

27 %

17%

17%

4%

Total three year return

55%

57%

152%

9%

Total five year return

114%

109%

238%

30%

Total ten year return

57%

63%

222%

74%

Further Research on market sentiment

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