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G. Chandrashekhar

Mumbai , July 22

THIS has been the most volatile year for gold prices since the early 1990s with the build up to the Iraq war being the catalyst for a first quarter surge and then fall in prices; followed by a second quarter rally based on the dollar weakness.

After the war, attention has moved into broader macro-economic issues. Here concerns remain about absolute and relative currency valuations (particularly the dollar); the lacklustre global economy; the remaining potential for terrorism and wider geopolitical tensions.

At the beginning of the second half, gold is still trading at around $350 an ounce, currently bound $20 above and below this level. Interestingly, the physical market has played a secondary role this year.

Physical demand has been rather poor with the combination of high and volatile prices and slow economic growth taking its toll. Physical supply on the other hand has been robust.

Given this picture, gold prices may be expected to remain firm over much of this year ($330-370/oz) as the plight of the US economy and equity markets continues to weigh on the dollar, according to Macquarie Research Equities' (soon to be released) Commodities Forecaster Report.

"Our base case is that signs of economic growth towards the end of the year plus growing debate about the renewal of the European central bank gold sales by September 2004 will see prices test below $320/oz heading into 2004,'' said Mr Kamal Naqvi, an analyst.

The report forecasts that after remaining in the positive territory for last few years, total physical gold supply may decline by 5.3 per cent in 2004 to 3,866 tonnes and further decline by 1.3-1.4 per cent following two years.

Total demand, on the other hand, will move into the positive territory, after shrinking between 6.3 and 10.4 per cent last three years, that is 2001-2003. For next year, demand is forecast to grow by 7.8 per cent to 3,310 tonnes and further on by 5.6 and 5.3 per cent respectively in the subsequent two years.

In other words, gold may soon begin a new innings, in cricketing parlance. The yellow metal is currently holding on to a higher range, but the dollar (vis-à-vis euro) will remain the key driver.

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