Investors' craze for gold to send prices to new records above $1,100 in 2008 - GFMS

By Clara Denina - Correspondent, clara@thebulliondesk.com (+44 (0)20 7929 6339)

London, 09 April 2008 - Gold will most likely resume its bull-run and hit fresh record highs in 2008, possibly above the $1,100 an ounce level, as a dire macro-economic environment will stimulate investment demand, industry consultancy GFMS said on Wednesday.

"We donít think current hesitancy means itís game over for the rally," Chairman Philip Klapwijk said when presenting the consultancy's updated Gold Survey 2008 at a seminar in London.

"Many of the drivers behind this investor push after all - dollar weakness, skeletons in banksí closets - are still very much with us," he added.

GFMS estimates a record price of $1,100 an ounce is "achievable" but gold is unlikely to rally further than $1,200 over the course of the year. This would put the metal well above current levels of around $900 an ounce and at an even better price than the all-time high of $1,032.60 hit on March 17.

According to the consultancy, the slide back to 2-1/2 month lows of $872.20 on April 1 was not surprising as the "speed of the earlier gains looked a little unsustainable".

Investment buying will remain the driving force behind the bull-run, against a background of a weak dollar, record oil prices and their inflationary consequences, the US sub-prime crisis and its threat to GDP growth in the US, and perhaps elsewhere, and lastly geopolitical tensions.

Interest for commodities is expected to remain strong this year, as the red-hot assets seduce more and more investors due to their role of wealth preservation and their safe-haven properties, while the move towards other assets like equities and hedge funds in recent years has proven partially unsuccessful, as these have performed poorly in the current environment of financial markets turbulence.

"We've seen confidence in banks take a severe hit. And more than a few have questioned the solidity of conventional assets in the face of a US recession, resurgent inflation and so on," Klapwijk said.

Implied investment is therefore expected to increase further in the first half of 2008, to levels well above 400 tonnes. In 2007, there was a major swing from disinvestment to investment, with total net investment reaching 158 tonnes for the full year.

CHINA TO CONSOLIDATE ITS LEAD AS WORLD'S LARGEST PRODUCER

Global gold mine production declined by just 0.4 percent in 2007 to total around 2,400 tonnes, with China dethroning South Africa as the world's largest gold producer. Global output is expected to remain around the same level in 2008.

"China is expected to consolidate its lead in 2008, primarily as a result of further declines expected in South Africa due to its ongoing power supply issues," Klapwijk said.

Africaís output fell by 29 tonnes in 2007, while Latin America dropped nearly 23 tonnes despite gains in Brazil, Mexico and Guatemala. Conversely, China posted a 33-tonne rise to become the top global performer.

On the demand side, high and volatile gold prices are seen slashing jewellery demand by at least 200 tonnes this year.

"Another break above $1,000 is a real possibility but even if gold does not reach four figures again in 2008, we still expect to see a fall of in excess of 200 tonnes in global jewellery demand this year," Klapwijk said.

However, jewellery fabrication rose by over 5 percent in 2007 in spite of a 15-percent increase in gold prices in dollar terms, with growth mainly seen in the Middle East, China and India.

In contrast, both Italy and the United States experienced a drop in jewellery demand, with the latter seeing its retail sales of jewellery falling by around 15 percent due to a combination of a faltering economy and high gold prices.

Producer de-hedging proved surprisingly strong in 2007, rising nine percent to reach a record of almost 450 tonnes due to a wave of book eliminations and buy-backs, with the bulk of activity taking place in the first half. By year-end, the global producer hedge stood at around 800 tonnes.

As for the official sector sales, news that the International Monetary Fund has approved plans to sell over 400 tonnes of gold confirmed GFMS expectations that sales are increasingly likely.

"Nevertheless, the time required for the proposed measures to gain approval from the IMFís members and, most importantly, in the case of the United States, obtain a 'green light' from the legislature, would suggest that a contribution to net official sector sales by the IMF is probably still some time away," Klapwijk said.

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