Gold fever.

Author:Siddiqi, Moin
Position:BUSINESS & FINANCE - Cover story

The world's oldest trusted asset and monetary hedge, gold--or the yellow ore--first discovered in southern Iraq some 5,000 years ago, is back in fashion due to buoyant demand in the Middle East and India, which together comprise half of annual gold sales worldwide. Private, institutional and official investors are showing strong interest in the multibillion-dollar bullion market. Gulf oil exporters are also using some of their petrodollar windfalls for the physical purchase of gold and investment in bullion-structured funds.

THE DOLLAR PRICE OF GOLD HAS increased by over 100% since it reached an historic low of $250 per troy ounce (oz) in August 1999, at which time the Bank of England decided to sell the majority of Britain's official reserves. Likewise, spot gold hit a 25-year high of $589/oz on 31 March, fuelled by rampant growth in jewellery, industrial and investment demand over the past year.

The World Gold Council (WGC), the bullion industry's promotional arm, says in a recently quarterly report: "Last year (2005) was a momentous one for gold demand, with record levels of consumer demand in dollar terms and a simultaneous surge in institutional investment. It is clear, both from the success of the gold-backed Exchange Traded Funds as well as our own marketing to financial audiences, that long-term investors are increasingly taking advantage of the investment benefits of gold." In essence, the metal remains a prudent investment for generations.

The WGC said gold sales rose 16.4% to $53.64bn for 2005, with investment demand growing faster than demand for jewellery. Overall worldwide retail gold sales broke through the $80bn level for the first time, reflecting sharply higher prices and strong demand. Jewellery fabrication accounts for about 73% of gold offtake, whilst investment and industrial users represent 16% and 11%, respectively, of aggregate consumption.

According to Gold Fields Mineral Services (GFMS), a London-based precious-metals consultancy, gold demand [in tonnage terms] rose by 7% to 3,754t with jewellery comprising 2,736t, up by 4.5% on 2004. Double-digit increases were recorded in India (up 14%) and Saudi Arabia (up 12%) with large increases of 6-8% in China, the UAE and Turkey during 2005. India was ranked as the world's biggest gold market, followed by the Middle East and Turkey, the US, Greater China (including Hong Kong and Taiwan) and Japan.

GFMS predicts gold this year will trade within the $490-$550/oz range, with the average coming in at $521, compared with $444.45 in 2005. Philip Klapwijk, executive chairman of GFMS, remarked: "Some people might think that [price projections] sounds a bit pessimistic ... But I think many would see the market's ability to sustain prices comfortably above $500 as something of an achievement. We're not ruling out further, possibly hefty, gains later in the year." Merrill Lynch, the Wall Street Bank, reckons that gold may end 2006 at between $575 and $600/oz. Whereas the New York commodities consultant, CPM Group, envisages gold settling at $502.3/oz in 2006, failing during the second...

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