Citigroup gold forecastCommodity Strategists: Gold May Rise, Citigroup Says (Update2)
May 19 (Bloomberg) -- Gold this year may surpass the 16-year high reached in December as the dollar falls, hedge funds bet on gains and jewelers increase purchases, Citigroup Inc. said.
``We expect gold prices to establish new multi-year highs in 2005, based on the likely resumption of the longer-term downtrend for the U.S. dollar,'' said David Rinehimer, a New York-based commodities analyst at Citigroup, the world's biggest bank, in a May 16 report. ``We expect limited downside potential'' for gold.
Gold prices would have to climb 8.1 percent to beat the $456.89 an ounce 16-year high reached Dec. 2. Gold rose to a one- week high today as the dollar traded near the lowest in almost a week against the euro in Europe today.
A weakening dollar boosts the appeal of the precious metal as an alternative investment to U.S. securities. Gold has slumped as the U.S. currency climbed 6.9 percent this year versus the euro on speculation the Federal Reserve will add to eight interest rate increases since June.
Gold for immediate delivery in London gained 16 cents to $421.91 an ounce as of 11 a.m. in London. It earlier rose as much as $1.50, or 0.4 percent, to $423.25, the highest since May 12.
The dollar fell 0.6 percent yesterday to its lowest against the euro since May 12 after the U.S. Labor Department said consumer prices, excluding food and energy costs, were unchanged in April, supporting Fed chairman Alan Greenspan's view that inflation is under control.
Hedge Funds
A decline in futures bets by hedge funds and other large speculators may combine with demand from jewelers to bolster gold prices, Rinehimer said.
In the two weeks to May 10, hedge funds and other speculators reduced futures wagers that gold will rise. Some traders are reluctant to buy gold if speculative long positions, or bets prices will rise, are high, because of concern selling of futures by hedge funds will exaggerate any price falls, Rinehimer said.
``A sizable reduction in speculative length, along with increased demand in the physical markets is expected to provide some underlying support to gold prices,'' Rinehimer said.
Speculative longs outnumbered short positions by 80,378 contracts on the Comex division of the New York Mercantile Exchange on May 10, according to the U.S. Commodity Futures Trading Commission. That's 42 percent less than two weeks before.
Gold demand from jewelers and other users rose 4.6 percent last year, buoyed by economic growth in India, Turkey and China, research group GFMS Ltd. said last month.
Prices of the precious metal might rise as high as $500 this year as the dollar declines because of a record U.S. current account deficit, Greg Foulis, who helps manage $400 million at Deutsche Bank AG's Scudder Gold & Precious Metals Fund, said.
Deficit
The deficit ballooned to a record $665.9 billion last year, the Commerce Department said in March, underscoring Americans' reliance on financing abroad to support their appetite for foreign- made goods.
``We believe gold is looking at a $400 to $500 range,'' this year, Sydney-based Foulis said in an interview yesterday. ``We believe that long-term we'll still get a reversion to a devaluation of the dollar, which will be positive for gold.''
Some analysts forecast gold will fall further as the dollar rises. Prices may drop below $400 an ounce in the final quarter of 2006 as rising U.S. interest rates boost the value of the dollar, David Thurtell a commodity strategist at Commonwealth Bank of Australia Ltd. said in a May 10 report.
``The tide will definitively turn for the dollar, and hence gold, from mid-2005,'' Sydney-based Thurtell said.
Gold prices may average $390 an ounce next year, down from $420 this year, as the U.S. economy grows and supports the dollar, Keith Huggan, a Sydney-based economist at Westpac Banking Corp. forecast in a report last month.