Gold rally to extend into 2011, macro fear persists

LONDON Thu Jul 22, 2010 7:46am EDT

LONDON (Reuters) - Gold prices are set to mark an eleventh year of gains in 2011 as investors seek refuge from an uncertain global economic outlook, with analysts revising up expectations sharply in a Reuters survey released on Wednesday.

A poll of 55 analysts and traders showed expectations for gold prices in 2011 have risen by nearly 7 percent to a median $1,228 an ounce, from a forecast of $1,150 in a similar survey conducted in January.

For 2010, expectations for gold have risen by 4 percent to a median $1,197.00 an ounce from $1,150.50 in January, when market watchers were forecasting prices to rise this year before plateauing in 2011.

Gold prices hit a record $1,264.90 an ounce in late June, as concern over the ability of several European countries to finance their debt burdens destabilized the euro and sharpened volatility across financial markets, fuelling an investor flight into the perceived safe-haven asset.

"Resurfacing concerns over another wave of recessionary conditions should keep investment demand for gold firm, as investors look to hedge against financial market volatility and vulnerability," said CPM Group analyst Rohit Savant.

Several governments including Greece, Spain and Portugal have imposed austerity measures to cut their deficits, which has injected a degree of confidence into the equity markets, where investors expect earnings to paint a picture of improving business investment and economic growth.

While this optimism has lessened the need of investors to protect their portfolios against more volatility with gold, fear of a slowing in overall growth has persisted.

SOVEREIGN DEBT PROTECTION

So far this year, gold is up nearly 9 percent at around $1,190 an ounce, putting it on track for its tenth successive year of gains by end-2010.

Gold-backed exchange traded products, such as the SPDR Gold Trust -- the largest of its kind -- saw hefty inflows in April and May as investors bought the metal to protect against the euro zone sovereign debt crisis, while national mints reported strong demand for bullion bars and coins.

Longer term, the market could face headwinds that come with a sustained economic recovery as global interest rates could rise, denting the appeal of gold, a non-yield bearing asset.

"The market is expected to derive strength from further economic pitfalls and the near-zero interest rates maintained by the U.S. Federal Reserve," said Harish Galipelli, head of commodity research at JRG Wealth Management.

"Sustained and balanced recovery in the U.S. however is expected to shift the Federal Reserve to a more hawkish stance, upon which selling pressure will emerge," Galipelli said.

Analysts toned down their expectations for silver prices this year, meanwhile, reflecting softer safe-haven buying of the white metal and disappointment that the much-hoped for global economic recovery has not been stronger and faster.

Analysts' average silver price forecast for 2010 dipped to $18.00 an ounce from $18.50 in January. For 2011, however, forecasts rose to an average $19.00 an ounce, up from $18.14 an ounce predicted at the beginning of this year.

Prices are seen rising throughout the rest of 2010 from around $17.70 an ounce currently to an average $18.40 in the third quarter and $18.80 in the fourth.

As silver is an industrial metal, widely used in electronics, as well as an investment vehicle, it tends to benefit less from investment demand than gold.

"In the near term, silver is likely to lag gold's price performance... due to the fact that gold attracts safe haven flows to the detriment of other precious metals in times of high risk aversion," said BNP Paribas analyst Anne-Laure Tremblay.

"If the economic recovery does indeed see a more solid footing in 2011, then we can expect silver to catch up and eventually outperform gold," she added.

(Editing by James Jukwey)