Gold - Getting It Right

JOHANNESBURG (Business Day) -- predicts gold at an average of around $625 an ounce for 2006 when gold is well below $600 - the past few weeks prove them mostly right. Classic Business Day gets Ross Norman from on the line.

LINDSAY WILLIAMS: Classic Business Day spoke to Ross Norman at a couple of weeks ago - actually less than that - and he was talking about an average price of $625 to $630 for 2006 which was a slight increase from when we spoke about six months ago. He was talking of spikes to $670 and $700 - at the time the price was well below $600. We had a spike to $645.80 yesterday and more volatility than we've seen in the gold market for many years, and also in the silver market. Ross, why did gold plunge from $645 down to $605 then back up to $625?

ROSS NORMAN: The market seems to have got somewhat ahead of itself in the move up - it's been a very gentle and consistent rally over the last five years. In the last five years we've had a 23%, a 25%, a 5% and a 20% rise - either side of 20% rises consistently year on year. This year we've seen an acceleration - at one point there was a 25% rise in the first quarter - so the market was clearly getting a little bit too hot, and people saw this as a good opportunity to take profits so of course the market fell extremely sharply.

LINDSAY WILLIAMS: Yes, it did. I think silver fell even more sharply - at one stage I think silver was down around 15% or 16% and maybe even more. Has silver been the favourite of the speculators, therefore the bubble in silver was bigger than gold?

ROSS NORMAN: Quite arguably so. Unusually, silver seemed to be the leader breaking through certain technical chart points, and through key levels - so it has very much been the funds' darling. Perhaps that was driven by the expectation of the launch of two silver ETFs in the coming months. To that extent silver was the quickest to fall, and it fell the furthest - almost twice as much as gold and also platinum yesterday. Unlike gold, it hasn't bounced as well - it's not unusual when you have these cathedral spire-type falls that the market subsequently bounces about 50% - that would put gold back to $628 or so, not far from where we are currently - but silver hasn't had quite the same resilience, and it hasn't bounced as well with more of a dead cat bounce as they say in the trading world.

LINDSAY WILLIAMS: If we can look back from a technical point of view at yesterday's fall - I think the Commodity Exchange of New York (Comex) actually raised the initial margin on its futures contracts by 25% or 30%. That would have knocked a few speculators out I would have thought?

ROSS NORMAN: I think it underscores the fact that if you're a long-term investor in precious metals sit with it - these swings we saw yesterday, a 6.5% fall in gold and a 13% fall in silver - are the kinds of things you can expect to see. Speculators who play in a shorter time frame on the other hand will get bloody noses - they will get stopped out, and lose a lot of money. If you want to play in the gold market perhaps a long-term view on these markets is perhaps the way to play it, and just to live with these swings that I'm afraid will become more commonplace.

LINDSAY WILLIAMS: So this was just the first of more swings? We got to $645 - you've been calling it much higher, do you still maintain the bullish stance that $645 was a near-term peak, and that we can go further than this?

ROSS NORMAN: Yes, I do think we will be in the $700s perhaps late in the second quarter, or perhaps the third quarter of 2006 - the market seems incredibly robust both in terms of external factors like the correlation with the oil market that we're still underperforming against - if the ratio held with that we'd be at about $1,000 an ounce now. I think it's gaining strength from the ETFs and more corporate and pension money coming into the market on a regular day by day basis - all this conspires to make one believe that the market has got plenty of strength, that it's "stronger for longer" as they say. The internal factor - supply and demand are equally compelling. I saw the Chamber of Mines in South Africa commenting that South African production may fall at a less sharp rate than we've seen in the past, but it's still down at a level last seen back in 1924 so supply is struggling. Demand is still rising very sharply - so I think there are a very large number of reasons to conspire together to ensure this market remains stronger for longer.

LINDSAY WILLIAMS: So by the time that England lift the World Cup at the beginning of the third quarter we could see gold in the $700s - is that what you're saying?

ROSS NORMAN: I think it's quite likely. A lot of those processes are in place - arguably the U.S. dollar being over valued as it still is people are talking about a possible 30% downgrade of the U.S. dollar. The U.S. administration's hawkish foreign policy is maintaining strong geopolitical tension around the world. I think a lot of these issues are not going to go away. The U.S. trade deficits - these are concerns that are not going to be put aside easily. Gold has underperformed, and although it seems rather bullish it has underperformed against other commodities like the base metals with their multi-decade highs with less compelling fundamentals attached to them - so I think yes, it's stronger for longer again.

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