Go for the Gold, But Silver, Not So Much

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Reuters poll says average gold prices to be 30% higher this year and silver to track

A Reuters poll says that average gold prices could rise by over 30% in 2008 compared wth 2007 as investors buy gold for its safe haven status.

Author: David Sheppard
Posted: Thursday , 24 Jul 2008

LONDON (Reuters) -

Average gold prices will gain more than 30 percent this year and hold onto gains in 2009, as safe-haven buying fuelled by ongoing financial risks will boost investor interest, a Reuters poll showed on Thursday.

A global poll of 40 analysts and traders conducted over the past month produced a median price for gold of $930.00 an ounce in 2008, more than a third higher than gold's average price of $696.95 in 2007.

That is more than 9 percent above the median forecast of $850.00 from a previous Reuters poll in January.

Spot gold was around $926 an ounce on Thursday, with many analysts tipping the precious metal to top $1,000 an ounce again by the end of the year.

But reflecting the high level of volatility across commodity markets, estimates ranged widely from $889 to $1,056 an ounce for 2008 and from $775 an ounce to $1,250 for the 2009 average.

Analysts forecast the gold price will struggle to sustain such hefty gains in 2009 with a rebound in the dollar expected to dampen demand.

The median forecast for next year also came in at $930 an ounce.

"We don't see much further dollar weakness, but the economic picture will continue to deteriorate so safe-haven flows should support gold higher to the end of 2008 and into 2009," said Daniel Smith, metals analyst at Standard Chartered.

Silver prices were seen rising by more than 30 percent in 2008, before easing in 2009.

SAFE HAVEN

Gold is expected to continue to benefit from worries in other markets, with financial instability, heightened inflation concerns and geopolitical tensions all seen as supportive.

Bullion hit an all-time high of $1,030.80 an ounce on March 17, as the combination of dollar weakness, record oil prices and the near collapse of U.S. investment bank Bear Stearns sent shock waves through the financial system.

Similar fears re-emerged in July, with the seizure of IndyMac Bancorp in the United States, and questions over the stability of U.S. mortgage giants Fannie Mae and Freddie Mac .

"If there are more bank failures then gold could move way above $1,000 an ounce," said Matthew Turner, analyst at Virtual Metals. "If the credit-crunch gets worse, then gold could really perform. It's been investment demand that's driving the price since last August rather than jewellery demand."

But lower physical demand, as jewellers baulk at higher prices, was also seen as one of the key reasons prices could retreat. Price-sensitive jewellery accounts for around 60 percent of total gold demand.

"Higher and volatile prices as well as slower economic growth have weighed on gold jewellery demand, particularly in price sensitive countries such as India," said Barclays Capital analyst Suki Cooper.

"Only once prices start to stabilise would we expect buyers to become accustomed to higher prices and in turn for demand to recover."

Predictions the dollar could strengthen in 2009 would also cast a shadow on gold's potential gains next year.

"Significant strengthening in the dollar and a subsequent fall in crude oil to around $80 a barrel should see gold prices lower," said Peter Fertig, consultant at Dresdner Kleinwort.

SILVER TO TRACK

Silver is expected to follow gold higher in 2008, with a median forecast of $17.50 an ounce in 2008, almost a third higher than the 2007 average price of $13.37 and up by 15 percent on January's poll.

Rising investor interest has boosted silver so far in 2008, with holdings in the iSharesSilver Trust, the largest silver-backed exchange traded fund listed in New York, standing at a record 6,138.45 tonnes on July 22.

But prices will struggle to move higher in 2009, with a median forecast of $17.10 an ounce as a slowing global economy knocks demand for industrial usage of the metal.

"Silver does tend to track gold higher but the fundamentals are not that good. There's rising mine supply and given the market is more industry driven, demand could suffer in light of the economic slowdown," Standard Chartered's Smith said.

Spot silver was around $17.40 early on Thursday.