Gold Bulls Say Long-Term Outlook Turning Positive

By James Attwood
 

Of DOW JONES NEWSWIRES

SYDNEY(Dow Jones)--Despite unconvincing near-term chart patterns, gold's long-term prospects are brightening as those of the U.S dollar darken, according to market participants.

Spurred by its traditional inverted correlation with the dollar, gold has gained 5% since mid-July but has been making progressively lower highs this year and is struggling to break resistance aroundUS$440.

Nevertheless, some market watchers say the metal can hit 18-yearhighs of around US$500 by year-end on a combination of macro-economic and industry-specific factors.

Reports overnight that Russia will cut dollar holdings in its currency basket and Middle Eastern oil proceeds are being converted from dollars into euros add weight to the argument that the dollar's days as the world's reserve currency are numbered.

The argument is based on an impending asset bubble burst as the U.S's debt-financed consumption boom, built on low interest rates, extends an already unsustainable current account deficit.

And according to U.S dollar doomsayers like Sydney-based research house Fat Prophets, the situation will bring a direct benefit to gold.

"We believe people are starting to question using the dollar as a store of wealth and will look more and more at tangible assets like gold," said the firm's senior analyst Matthew Newham.

Newham also expects more cases of "petro-dollars" being converted into hard assets, which last happened on a grand scale in the 1970swhen sky high oil prices helped send gold to an all-time high US$850.

Fat Prophets expects gold prices to return to those levels within three years.

Asian Demand To Keep Rising Asia's growing physical demand for gold is seen as another long-term price supporter, especially after China's recent decision to unpeg its currency from the U.S dollar, giving domestic gold buyers more purchasing power as a result.

Darren Heathcote, head of trading at N M Rothschild & Sons(Australia) Ltd., expects the Yuan revaluation to help China's gold consumption rise by up to 20% from 235.1 metric tons last year.

"It's only a matter of years before we see (China) up there with India in terms of overall quantity," Heathcote said. India is the world's largest importer of gold, with 2005 imports expected to exceed700 tons.

Supporting China's growing gold demand is the economy's anticipated shift in focus from developing production and exports to domestic consumption and imports, said Westpac Bank currency strategist Robert Rennie.

"Logically, one of the things China will ultimately look to import will be precious metals," Rennie said.

Beijing's recent decision to allow four major commercial banks to sell gold bars to their customers is also expected to boost investment demand for gold, while gold exchanges continue to gain more and more public acceptance.

But while some have suggested the Yuan's unpegging from the U.S dollar may increase the likelihood of China and other Asian countries diversifying their foreign reserves, Rennie said it won't necessarily be by buying gold.

Eventually, however, countries with large U.S. dollar reserves, such as China and Japan, are expected to look at gold as a way of diversifying reserves even as European central banks continue their measured sell-off.