Gold Prices Could Slump Below $810/oz by July's End

SHANGHAI (Interfax-China) -- International gold prices will tumble below $810 per ounce by the end of July on the back of the traditional May-June low consumption period, a rebounding U.S. dollar and a possible pull back in crude oil prices, with domestic prices likely to follow, analysts told Interfax yesterday.

The front gold delivery on COMEX stood at $867.9 per ounce as of 15:36 Beijing-time yesterday, while the most traded June gold delivery on the Shanghai Future Exchange (SHFE) closed at RMB 193.75 ($27.72) per gram yesterday.

"International gold prices will continue their downward movement through the end of July, due to the slack consumption season from May to July," Sun Fan, an analyst with Shenzhen Goldbull Futures, said.

"Moreover, investors now believe that the U.S. economy has passed its weakest point and is starting to recover. This will give a shot in the arm to the U.S. dollar, while beating down gold prices, " Sun said.

"Once international gold prices fall below the $850 per ounce mark, they will stay in a downward trend and touch prices below $810 per ounce," Sun said.

"The U.S. dollar has been falling since August last year, and it now needs a technical rebound. The market expects a U.S. economic recovery, which will support the dollar," an analyst named Fang Jing with CGS Ltd., a Chinese gold trading platform and gold market information provider, said.

"It's very likely that the U.S. dollar will stabilize above 74 points by the end of the second quarter," Fang said.

Moreover, the International Monetary Fund (IMF) announced on April 6 that it will sell 403.3 tonnes of gold stocks in near future. This led to an immediate drop in international gold spot prices.

"Crude oil prices have been affected by political problems in major crude oil producing regions, and now stand far from current market supply and demand fundamentals. As a result, prices may undergo a technical pull-back once they reach $125 per barrel, and are set to return to around $110 per barrel by the end of May. This would further drag on gold prices," Fang said.

"Domestic gold prices are likely to follow the international market, and fall below RMB 190 ($27.18) per ounce by May," Fang said. "Domestic gold prices will also be beaten down by continued Renminbi appreciation."

SHFE gold futures prices rebounded strongly today, as the results of yesterday's European Central Bank meeting strengthened market sentiment. The June contract gained RMB 3.50 ($0.501), or 1.81%, closing at RMB 197.32 ($28.23) per gram.

"The European Central Bank announced last night that it will keep interest rates unchanged at 4%, which will give short term support to the euro and stopped the rebound of the U.S. dollar dead in its tracks today. Precious metal prices all closed higher today," Liu Xu, an analyst with Shouchuang Futures, said.

Commentary

We are of the belief that gold will rally through to US$900 in the near term. Agreed, there may be some strengthening of the dollar, although this will have little to do with a recovery in the U.S. economy, which is simply unlikely to occur this side of 2009. Nor is it likely that we have seen the bottom of the financial crisis.

Of course, it is highly probably that equity markets will bounce from time to time, lulling some investors into a false sense of security, yet we do not see these mini rallies as a sign of an end to market turmoil. These continued uncertainties will underpin gold price. As for the appreciation of the Renminbi, we see this bolstering demand as the metal becomes more affordable to the domestic consumer.

(c) Interfax-China 2008. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at david.harman@interfax-news.com. Interfax also publishes a comprehensive China Grains & Soft Special Report, contact David Harman for details.

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