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Peter Brimelow: 2004 ends quietly, except for gold

Section: Daily Dispatches

Gold May Rise in First Week of 2005
on Dollar Weakness, Survey is Told

By Laura Humble
Bloomberg News Service
Monday, January 3, 2005

LONDON -- Gold prices may rise in the first week
of 2005 after the dollar's drop to a record against
the euro increased the precious metal's appeal as
an alternative to U.S. stocks and bonds.

Eighteen of 34 traders, investors and analysts
surveyed from Sydney to New York on Dec. 30 and
Dec. 31 advised buying dollar-denominated gold.
Twelve recommended selling, and four were neutral.
The dollar touched $1.3666 per euro on Dec. 30,
the lowest since the 12-nation currency was
introduced in 1999.

"Concerns about unsustainable deficits in the U.S.
should result in a further reallocation into euro
assets and gold," Frederic Panizzuti, senior vice
president at MKS Finance, a Geneva-based
precious-metals trading and refining company, said
in an e-mail. He recommends buying gold and
forecasts an average price of $430 an ounce this
year, $20 higher than 2004.

Gold rose 5.5 percent in 2004 as the dollar fell 7.2
percent against the euro. The U.S. currency
slumped as a deficit in the nation's current account,
the broadest measure of trade and investment,
widened to a record $164.7 billion from July through
September, meaning more dollars must be
converted into other currencies to pay for imports.

Gold for immediate delivery in London rose 45 cents
to $438.45 an ounce on Dec. 31. Prices, which
reached a 16-year high of $456.89 on Dec. 2, have
climbed 74 percent from a 20-year low in August

The metal fell 0.9 percent last week, the first drop
in three weeks. The majority of gold investors and
analysts in the survey correctly forecast the market's
direction in 22 of 36 weeks.

Gold futures for February delivery closed at $438.40
an ounce on the Comex division of the New York
Mercantile Exchange on Dec. 30, bringing the year's
gain to 5.4 percent. A futures contract is an obligation
to buy or sell a commodity at a set price by a specific

The U.S. needs to attract about $1.8 billion a day to
finance the trade deficit and keep the value of the
dollar steady, according to Bloomberg calculations. In
addition, the U.S. budget deficit was a record $412.6
billion in the year ended Sept. 30, swelled by costs
of occupying Iraq and strengthening domestic security
against terrorists.

Hedge fund managers and other large speculators have
been placing bets on higher gold prices.

Speculative long positions, or bets prices will rise,
outnumbered short positions by 90,253 contracts on
Comex in the week ended Dec. 21, according to U.S.
Commodity Futures Trading Commission data.
Net-long positions rose by 2,459 contracts, or 3
percent, from a week earlier. They reached 138,632
in the week ended Nov. 23, the highest since April.

"The start of the New Year will see speculators
instigating fresh positions,' James Moore, an analyst
at U.K.-based who favors
buying gold this week, said in an e- mail. "Our outlook
for the year is still for higher levels with growing U.S.
deficits and oil-driven inflation the main catalyst."

Inflation erodes the value of fixed-income assets such
as bonds, driving investors to alternatives such as
gold. Gold futures surged to $873 an ounce in 1980,
when U.S. consumer prices rose 12.5 percent.

Oil in New York sold for an average $41.39 a barrel
last year, the highest since trading began in 1983,
and reached a record $55.67 in October. Prices
paid by U.S. consumers rose a fourth straight month
in November, keeping inflation at the fastest annual
pace in at least four years.

"I see the dollar getting weaker, and I think there
is more underlying inflation than economists are
projecting," William O'Neill, a partner at Logic
Advisors LLC, a commodity consulting company in
Upper Saddle River, N.J., said in an e-mail. He
recommends holding gold.

Dennis Gartman, editor of the Gartman Letter
newsletter in Suffolk, Virginia, predicted that gold
will fall "a lot lower." The metal dropped 1.6 percent
on Dec. 29, when crude oil jumped 4.5 percent.

"Something that doesn't rally when it should, won't,"
Gartman said in an e-mail.

An earthquake and tsunamis in the Indian Ocean
that killed more than 120,000 people also may hinder
buying. India is the world's largest gold market.

"One concern is sales of metals in Asia as those
around the Pacific Rim begin to rebuild their lives,"
Moore said.


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