JP Morgan sees higher levels still for soaring gold price

JP Morgan, the bank, yesterday raised its forecast for gold prices for the next three years due to a tighter supply outlook for the commodity, as well as more general political and economic drivers.

Nick Moore, head of commodities research at the bank, said that the supply of gold was weakening, leading to the prospect of higher prices. He added that geo-politics and the bursting of the bond market bubble were also playing a role. Despite a healthier economic outlook, the fiscal and monetary loosening we have seen, especially in the US, had led investors to worry about inflation again: "This is where gold's role as a hedge against inflation comes into play," he said.

JP Morgan's annual average price forecast for 2003 was raised 6.5 per cent to $362 a troy ounce, while its estimate for 2004 was increased to $376 an ounce from $335 and in 2005 to $368 from $345. Mr Moore said: "Behind the upgrade lies the common theme of the realisation of renewed global economic growth. But also we feel that geo-political stimulus is playing a greater role than we had previously envisaged."

Mr Moore said that substantial producer de-hedging, contracting mine supply, increased interest from non-traditional sources, gold's inverse relationship with the dollar and ongoing geo-political uncertainty had all led to a renaissance in gold's role as an investment.

Gold has strengthened recently despite a generally stronger US dollar and has shown solid price growth in the face of a record long speculative position on New York's Comex gold futures market. Bullion prices have also held strong despite evidence of a US economic recovery. Normally, defensive investments such as gold would weaken as investors switch back into other assets, such as equities.isks remain however, with prices seen coming under pressure from renewed central bank sales or rising interest rates which could encourage fresh producer hedging.

Mr Moore said: "A key issue for gold seems to be the huge size of the bond market, $13 trillion versus about $100bn for gold-listed securities. Hence only a small switch of funds out of a bond market ... could have impact upon gold. On the flip side, a bond rally could return some funds to this sector and deliver a sell-off in gold."