Heightened Gold Volatility Expected in 2008 as Gold Moves Towards $900

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It is argued that it would be a great surprise if gold did not rise to $900 ounce during the year and that if the background macro-economic circumstances in the US and a weaker dollar fail to take gold to $900 then it would be a strong indicator that it has reached a new historic ceiling.

VM Group, in conjunction with Fortis Bank, has released its latest "yellow book", in which the group looks ahead to 2008 and forecasts that the gold price is heading for one of the most volatile years for some time. A small production surplus of 123 tonnes is expected, which would be equivalent to just less than two weeks' projected consumption and investment demand and suggests that investor purchases will be important if prices are to remain strong. Given that the residual surplus is this small, the study acknowledges that small changes in the environment could easily swing the market into deficit, and also that the closeness of the balance intensifies the importance of external forces. The major factors affecting the market are thus identified as the fate of the US dollar, that of the western economies and prospects for Asia.

The group takes the view that the prognosis for continued background macro-economic problems relating to the probability of a US recession and additional dollar weakness suggests that there will be no lack of investment activity...

The performance of the US currency and the background economic outlook for the US is seen as the main guide to the price trend of 2008. This is where politics enters into the fray. The study states that "This is an election year and there will be such pressure from the White House that the Federal Reserve will do whatever it takes to stave off the threat of recession. This will translate into much lower US interest rates - perhaps a cut to as low a 3% by the end of 2008 - and a much weaker dollar than today". The study goes on to aver that gold could benefit from either or both of a weaker dollar and a recession, which latter would be likely to instigate a "rush from equities".

It is argued that it would be a great surprise if gold did not rise to $900 ounce during the year and that if the background macro-economic circumstances in the US and a weaker dollar fail to take gold to $900 then it would be a strong indicator that it has reached a new historic ceiling. By early 2009, with a new incumbent in the White House, "the going is likely to get much trickier for precious metals" says the group.

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