Gold bear sees speculators fleeing; gold bulls cite dollar weakness

Section:

By Fiona Ortiz
Reuters
Thursday, May 6, 2004

http://www.reuters.com/newsArticle.jhtml?storyID=5067338

LIMA, Peru -- Analysts at a gold conference in Peru disagreed
strongly on Thursday over where the price of gold was headed,
with one expert predicting a sharp drop to $350-$360 per ounce
while others said it was on its way up to the $450 per ounce
range.

Mining consultant Leonard Harris of the Veneroso Associates
market analysis firm said speculators who have taken huge
leveraged long positions in gold futures contracts encouraged
by low U.S. interest rates will leave the market in the short
term, taking gold prices down to $350-$360 per ounce.

Speaking at a gold industry forum in Lima, Harris took a
bearish position that contrasted with analysts from
Goldman Sachs and Gold Fields Mineral Services, who
told delegates that gold was heading for $450 an ounce
or even higher.

"If speculator interest in gold contracts further we expect
the price might be taken down to $350-$360 level," Harris
said.

Gold peaked in January at 15-year highs of $430.50 an ounce
but has since retreated. On Thursday June gold on the
COMEX metals division of the New York Mercantile Exchange
closed at $388.40 an ounce.

"Record net speculator long positions encouraged by low U.S.
interest rates will correct. This correction is inevitable,"
Harris said.

He said speculative positions in gold futures are at an
all-time high of 600 tonnes on COMEX and overall speculative
positions, including over-the-counter transactions, could run
into thousands of tonnes.

The reason speculative positions in gold are so huge, he said,
is that normally conservative institutions like pension funds
and private banks have invested in commodities as a hedge
against what are seen as possible deliberate measures by
the U.S. Federal Reserve to raise inflation.

"The recent explosive rise in commodities prices is due to a
degree of speculation with no precedent," he said. "There is
currently great vulnerability in commodities prices."

Near-term outlook will depend on leveraged speculators,
whose sentiment will be directly affected by a slowdown of
Chinese growth, which has driven demand for commodities,
or by a strengthening dollar.

He also said that unless U.S., European, and Japanese
growth rates exceed expectations there is little reason
to expect continued support for today's commodity prices.

Alberto Arias, leading mining analyst for Goldman Sachs,
told the conference that he sees an average price of $417
per ounce over the coming months, ranging between $380
and $450 per ounce.

"There is not enough (mining production) capacity so we
think the cycle will go forward and there are more peaks
ahead," Arias said.

He also cited what he said was a continued weakness of
the dollar due to U.S. trade deficits, and an anti-hedging
sentiment among the big gold producers as incentives to
higher gold prices.

Arias said the next two years were a critical time for
miners to generate new projects by investing in
exploration.

Exploration investment fell from 1997 to 2002, and just
started to pick up last year as commodities prices soared.

Bruce Alway, analyst with London-based Gold Fields
Minerals Services, a leading industry body, had earlier in
the week told the conference that he sees gold at
$390-$450 this year.

Alway told Reuters that the fact that gold was already
climbing off of last week's lows showed that the speculators
have fallen out.

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