Propitious Conditions for Gold

Source:

"We are going to see, after a bit of a lull, investment demand come back with a vengeance."

U.S gold futures slipped early Thursday as some investors unwound their safe-haven play when the dollar strengthened and equity markets firmed, following positive earnings news and improved economic prospects.

Gold for June delivery GCM9 lost $6.50 to $879.40 an ounce on the COMEX division of the New York Mercantile Exchange.

According to analysts, optimistic investors read many recent commodity price gains and positive economic readings as an end to the downturn and are starting to unload safe-haven gold. What added to the melee was a firmer dollar, which also weighed on gold prices.

Earlier on Wednesday, gold rose for a second straight day in New York, as some investors purchased the metal to hedge against financial turmoil. Silver also gained.

"The reasons why investors bought gold - fears of longer-term inflation and currency debasement - remain intact," John Reade, the head UBS AG metals strategist in London, said in a report. Once gold prices have stabilized, "we expect bottom-fishers to begin the next cycle of investment," he said.

Early in the week, precious metals researcher GFMS Ltd. provided the necessary fillip, by stating that gold would surpass last year's record on speculation that inflation would accelerate, fueled by government programs to bail out failing banks and ease the recession.

As investors seek to guard against rising inflation, gold price could rise to a record above $1,100 an ounce in the coming months, the GFMS added.

According to GFMS' executive chairman, Philip Klapwijk, gold investment is likely to rise sharply in 2009, taking up the slack caused by an expected double-digit drop in jewelry demand.

In an interview to Reuters, he said: "There is no reason you couldn't see more like $40 billion going into the market (this year). That is still a pretty small chunk of change compared to the flows you see going into mainstream assets." He added: "Conditions are very propitious for gold investments. We are going to see, after a bit of a lull, investment demand come back with a vengeance."

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