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Sun 5 Nov 2006 12:00 AM

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Gold prices soar as oil drops over market fear

Gold prices are set to soar due to the commodity’s strong demand towards the end of the year -but experts fear they may be affected by flagging oil prices.

Gold was trading at US$598.4 an ounce in London last Monday- a decline of 16.9% from US$719.7 an ounce in May but is now expected to rise again throughout the final quarter of this year.

Gold has been rallying up in the summer months when political insecurities about Iran and the war in Lebanon heated up prices.

“After tension eased and the dollar continued to weaken gold prices fell too but are now set to rise again due to high demand,” said Asim Khan, director of trust securities brokerage at the Dubai Multi Commodities Centre (DMCC).

“Since November and December are the months of the wedding season in Asia, especially India and Pakistan, consumer demand is usually soaring by then. Also, by year-end fund managers typically invest into gold,” he added.

Ian Cockerill, CEO of Gold Fields South Africa, the world’s fourth biggest gold producer, said, “The secular trend that started in March 2001 is still intact. We are positive on gold and are certainly looking at higher gold prices in the future.”

But despite promising demand prognosis, gold might be affected by down spiraling oil prices.

“These two commodities normally move simultaneously, since they have a lot in common. They are both priced in dollars, both are not regulated by pure fundamentals but market sentiments, and both are considered as safe investment havens,” Khan explained.

“So if oil continue to go down, gold is likely to follow this trend,” he added.

Last week, oil prices reached their lowest level this year with US light crude at US$57.18 a barrel after losing 4%, some US$2. Prices have fallen 20% since hitting record highs in July.

Ample US fuel stocks and persistent doubts over the Organisation of Petroleum Exporting Countries (OPEC) output cuts have been responsible for the development, since traders are still wondering if the cartel’s producers will stick to the promised 1.2 million barrels per day reduction, which is set to be effective from 1st November.

The UAE and Saudi Arabia have announced production cuts to their customers, but other OPEC members such as Kuwait and Libya yet need to follow the move.

Nigeria is actually expected to boost production in December despite its pledge to reduce its quota.

It was the first to initiate voluntary cuts, and has promised to curb 100,000 bpd as part of a broader OPEC agreement.

However, Africa’s top oil producer is now scheduled to ship 2.09 million barrels per day of crude oil in December - up 50,000 bpd from the previous month.

Its December export schedule showed planned loadings of around 64.8 million barrels, up from 61.1 million barrels in the published November programme.

West African cargoes usually trade about two months ahead of time in the physical spot market.

The Nigeria’s three domestic refineries continued to run at around 220,000 bpd, implying Nigerian output in December at 2.31 million barrels per day.

Analysts and trader are hence doubtful if Nigeria, the world’s eight largest oil exporter, will ever come to terms with cut agreements, since crude production and shipment as of now continue at their usual pace.

“The dominant speculative sentiment remains overwhelmingly bearish,” a Barclays Capital report says. “Those on the short side who are expecting global economic weakness and weak OPEC cohesion are unlikely to change those core views in a hurry.”

Oil analyst Makoto Takeda of Bansei Securities, however, said he expects oil prices to eventually return above US$60 a barrel.

“It’s unlikely that we’ll see full implementation, but that’s not important because the Saudis have committed to their reduction,” he said.

“There is a likelihood of a further cut in December, so some traders are nervous about selling further.” He ends.

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