Gold prices may stay firm at $670

Gold prices are likely to average $670 this year, a rise of 11 per cent over the last year's average of $604, on the back of a weak dollar, US deficit, and rising energy prices, according to a report by a London-based research firm. The firm sees prices averaging $700 in 2008.

In recent years, the price-sensitive physical gold market had seen successive price rises followed by quick re-adjustment of ideas on what constituted a fair and sustainable price, the report by Natixis Commodity Markets said.

This ratcheting up of the floor price, on which jewellery demand kicks in and scrap supply fades away, has created confidence among the investor community and minimised risks involved in profit-taking.

The rationale for the upward forecast rests upon two key assumptions: Investor interest remaining at sustained levels and decent levels of GDP growth in the developing world, particularly in India and China. This would allow for greater price resilience in their jewellery markets, the report added.

Even as the physical demand was disappointing, gold did not seem to face a supply threat. As most of the loosely held or aged retail stocks were sold during the rally in April-May 2006, the supply of scrap should fall in 2007, unless prices rally dramatically, the report added.

A common feature in recent years is the weakness in prices during summer months before rallying in the fourth quarter. This could again happen in 2007, with gains carrying on to 2008, the report said.

Talking about silver, the report said receding mine production was likely to boost average price of the white metal to $14 this year from $11.55 in 2006. Next year, the precious metal will average more than the 2007 figure.