UBS International Bank shares Merrill's bullish view on gold in the short term, but sees a more volatile scenario unfolding.
UBS expects that the current upward momentum in the gold market could propel the metal's price above $1,000/oz, even in the wake of weak fundamentals, and that gold will continue its strong relationship with the euro/dollar exchange rate. UBS also anticipates, however, that gold prices will decline later this year.
We are in an investment and speculative-led overshoot, where the price is set not by the normal fundamentals of jewelry demand and mine supply, but speculative and investment buying.
--John Reade
"We forecast that gold can trade higher from current levels and see the metal trading to as high as $1,000/oz at some point this year," said John Reade, head of metals strategy for the London-based firm. "But we also see gold ending 2008 somewhat lower than current levels due to our view that the dollar will firm in the second half of 2008, at least against European currencies."
According to Reade, gold is currently trading at $150-200 above the level at which he considers the metal to be supported by physical fundamentals.
"Indian and other jewelry demand ranges between light to non-existent; and scrap flows are reportedly strong," said Reade. "It seems clear to us that we are in an investment and speculative-led overshoot, where the price is set not by the normal fundamentals of jewelry demand and mine supply, but speculative and investment buying."
Reade expects gold to decline to a low of $700/oz at some point this year. He noted that the $300 range between the high and low prices he is forecasting looks large, but it's only slightly larger than the $240 range of 2007.
"We believe the market is increasingly vulnerable to the upside due to positioning in the options market, and yet the higher gold gets above its fundamental support, the greater the chance of a very deep correction," said Reade. "Accordingly we forecast that gold will average $825/oz this year. We have also lifted our forecast for 2009 and now see gold at $750/oz. We also introduce an explicit forecast for 2010 of $720/oz."
Mine production has not kept pace with gold prices, according to Reade. He noted that gold prices have more than trebled over the past six years, "moving from a 22-year low of $252/oz in 2001 to breach the prior all-time high of $850/oz at the start of 2008." Yet mine production has declined to an estimated 2,485 mt in 2007 from its peak of 2,645 mt in 2001.
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