Gold Investment Seen As Strong in '08

Analysts expect gold investment to be strong in 2008 for many of the same reasons it was robust during latter 2007 _ a soft dollar, fears of inflation and flight-to-safety amid credit-market worries.

Some say the high price _ with spot metal last month hitting $845 an ounce for the first time since 1980 _ could curb enthusiasm for consumer purchases such as jewelry. Still, demand may be less affected by higher prices than in the past due to rising incomes in emerging economies, observers say.

"Next year should be a very good year on the investment-demand side of things," said Bill O'Neill, principal with LOGIC Advisors. "There is enough going on in outside areas, with potential pitfalls, that flight-to-quality demand is going to be there for hard assets."

In particular, he cited ongoing subprime and credit-market problems.

JPMorgan strategist Michael Jansen added that buying of gold to insulate portfolios from dollar weakness and as a hedge against potential inflation will strengthen investment.

"Gold historically has been a place to hold value, and that will continue to appeal to investors," Jansen said.

Bart Melek, global commodity strategist with BMO Capital Markets, said total gold demand in the second half of 2007 is expected rise around 11 percent, including fabrication, bar holdings and implied net investment. He looks for strength to continue in 2008.

"I continue to see the U.S. dollar being fairly anemic," he said. While it may not weaken materially against major currencies such as the euro or Canadian dollar, the sizable U.S. trade and current-account deficits may remain a drain on the dollar, he said. Since gold tends to move inversely to the greenback, further dollar weakness means potential upward pressure for gold, he said.

Furthermore, as other currencies rise versus the dollar, central bankers in other countries may seek to moderate that activity, Melek said. So while he looks for the Federal Reserve keep easing, other nations also may cut interest rates to keep muscular currencies from hurting their export economy. Already, the Bank of England and Bank of Canada trimmed rates in recent weeks.

Any worldwide easing of monetary policy could increase inflationary pressures at a time when commodities, such as food and energy, are already high, Melek said.

"Gold investors will look at that (easing) and like gold because not only will it be a hedge against a (soft) U.S. dollar, but it will be a hedge against inflation," Melek said.

Frank Holmes, chief executive and chief investment officer of U.S. Global Investors, said global money supply may grow and support gold as governments try to rescue credit markets hurt by "toxic debt" due to subprime issues. This especially may be the case in the U.S., since 2008 is a presidential-election year.

Investment demand for gold accelerated in the second half of 2007, Jansen said, "making up" for a lackluster first half.

Holdings backing the world's largest gold exchange-traded fund, streetTRACKS, rose from 453.24 metric tons at the end of 2006 to 500.72 in April, then fell back to 464.37 at the end of June. Since, however, it surged to 614.67 on Dec. 11.

Holmes said so much money entered exchange-traded funds that streetTRACKS bumped China from No. 10 on a list of the world's top gold holders.

"In terms of investor demand going forward, we continue to be on the bullish side," Jansen said.

JPMorgan looks for implied investment demand of 275 to 300 metric tons in 2008, he said. This compares with 480 in 2005, 420 in 2006 and a projected 80 to 100 tons in 2007, Jansen said.

When gold prices rise, worries arise that it will dampen physical demand, such as for jewelry. However, this fear may be offset by growing incomes in emerging-market economies, analysts said.

"There is some evidence to suggest jewelry demand is not as price-elastic as it has been," Jansen said. "That is a function of stronger wealth effects, especially from major markets and particularly in India."

The weaker dollar also makes commodities more affordable in other currencies, Melek said.

Gold is often bought during a series of gift-giving seasons around the world, with key global holidays running from September to the Chinese New Year early in the year, Holmes said.

Often when gold spikes to longtime highs, Indian demand contracts until the market forms a higher base, then buying resumes, he said.

"I do see the jewelry demand being stronger. And I see investment demand growing more and more," Holmes said.