Precious metals prices will remain elevated…..

Precious metals prices will remain elevated on geopolitical concerns
By Tom Stundza
Purchasing.com

While nonferrous prices are expected to retreat in 2007 from this year’s record-setting highs, precious metals prices could keep elevating. Supply isn’t really an issue outside gold; and demand is erratic from industrial, commercial and electronic products manufacturers. The big reason for inflation is that worries about Iraq’s political landscape, the value of the dollar, economic growth, nuclear saber-rattling by Iran and North Korea, and Chinese central bank strategies have made precious metals attractive safe havens for investors.

Analysts at the Standard & Poor’s credit-ratings house and numerous brokerages point out that where investors go, so go the prices of precious metals. And, since 2000, the market prices for key industrial precious metals have inflated by 91%. The market mavens forecast that since the dollar is expected to keep weakening next year, the prices of gold, silver and platinum group metals will continue to escalate through 2007.

There’s “concern that change in both houses of Congress might spur some inflationary policies, but that remains to be seen,” says senior analyst Phil Flynn at Alaron Trading. “Some policies of the Democrats may be dollar negative, and bullish for the precious metals.” Overall, it “seems like there’s a movement back to hard commodities,” Flynn adds, and it “looks like commodity funds are coming back in.” Julian Phillips, an analyst at GoldForecaster.com, agreed funds are dominating the trend short term, “but longer term, the fundamentals dominate the trend, which is up.”

Expect more investor activity to impact precious metals prices.
The consensus of analysts for gold is an average $715/ounce next year, as compared with an expected $600 this year. “Some tight-supply factors have fueled the escalation in gold prices—and this scenario likely will persist through 2007, thereby underpinning prices,” according to the Standard & Poor’s analysis. “Production is declining as output from mature mines in Australia, North America and South Africa drops. In addition, there are too few projects that could reverse the expected decline in production because permitting and building new mines usually takes several years.”

The Standard & Poor’s analysts caution that “when factoring in fund investment, gold prices will stay true to form by remaining extremely volatile and unpredictable.” But, most other analysts predict that political tensions, increasing Asian jewelry demand, stockpile reductions by producers, and anxiety over terrorist activities—all of which have weakened the dollar—“will all continue to support further increases in the price of gold,” says the Standard & Poor’s analysts.

Also a factor is reduced housing, automotive and appliance activity—which have weakened the dollar. Precious metals prices tend to stiffen when the dollar weakens; which, in turn, tends to be a reaction to political uncertainty. So, with the return of the Democrats in control of the U.S. Congress, analysts say gold market participants will have to watch upcoming government spending trends.

If spending is curtailed and political transparency returns, says an analysis by NSFutures.com in Chicago, then prices eventually will drop—but that will take some time. In the meantime, though, the dollar and gold also react to geopolitical events. So, the metal’s price is being propped these days by the Chinese central bank’s fourth-quarter decision to diversify investment away from U.S. assets.

Various analysts suggest that China might even add more gold to its reserves, which would provide the capability to support gold prices for years to come. “China could raise their gold reserves to as much as 5% or 6%—from 1% at present—and that has the potential to change the world gold supply and demand equation dramatically,” writes Anne Ziron at NSFutures.com. “While we see the Chinese thing providing long-term support to prices, the upward track probably won’t be a straight line.”

Silver may rise also. Spot prices for silver prices are more volatile than gold and tend to react more to industrial buying activity than gold. In fact, the silver market hasn’t paid that much attention to the ebb and flow of either North American or global economic activities. Silver is expected to average more than $11/oz this year, which is lower than its second-quarter average of $12.50 but this metal has seen less speculator involvement.

Also note that silver probably won’t be a target for Chinese reserve buying. Still, analyst Paul Galloway at UBS Securities says “it’s difficult to say where the current sharp upwards movement in price will end.” He agrees with the suggestion that any monthly price in the $13-$14 range next year could prompt sustained investment interest that would boost the full-year average price to the bullish consensus outlook of $13.50.

Meanwhile, prices for platinum have started to weaken since record-high midyear pricing accelerated partial substitution by palladium in the emission control equipment for diesel engines. Also a factor are the North American cutbacks in automotive assembly. But, analyst John Reade at UBS Securities says “the underlying fundamentals remain sound and steady industrial interest along with the recent strength in gold is helping to contain any real price weakness.” That’s why the consensus forecast suggests that 2007 price average of $1,184/oz is slightly stronger than the $1,140 of this year.

Consistent industrial interest also has boosted palladium prices—especially since investor and speculative activity has been muted and monthly prices have been trading in a sideways pattern, says analyst Ziron at NSFutures.com. “We are positive on the fundamentals for the palladium business as growth in jewelry demand—especially in China—is chipping away the market surplus.” That’s why analysts believe spot prices will average $379 in 2007, up from $319 this year.