By Atul Prakash
LONDON (Reuters) - Gold prices will set a record high this year in terms of their annual average and may scale new absolute peaks on a weaker dollar outlook, a slowdown in the U.S. economy and geopolitical tensions, a report said on Wednesday.
Precious metals consultant GFMS said in its Gold Survey 2007, which marks the 40th anniversary of its annual report, that worries over high oil prices and inflation might resurface should the United States decide to ratchet up the pressure on Iran.
"It's looking pretty certain that the record in terms of the annual average, $614.50 (an ounce) back in 1980, is going to fall this year," GFMS Chairman Philip Klapwijk said in a statement.
The average gold price was $603.77 an ounce last year.
"I would also be far from surprised if this year we saw the market moving above the 2006 high of $725. Quite whether we would then get close to the all time high of $850 is more doubtful, but I would certainly expect the upward price trend to continue on into 2008."
Firm gold prices so far this year, the acceptance of higher floor prices by physical buyers and a further, albeit smaller, decline in gold supply were also expected to boost investor confidence in the metal, the report said.
GFMS expected a drop in scrap supply in the first half of 2007 and subdued selling by central banks, which was likely to offset a modest rise in mine output this year.
Global mine production fell 3 percent to a 10-year low of 2,471 tonnes in 2006, with the maximum fall recorded in Asia despite China lifting output by 8 percent. GFMS forecast world production rising between one and two percent in 2007.
Central bank sales fell by 51 percent to 328 tonnes in 2006, resulting in a five percent drop in total gold supply to 3,906 tonnes. GFMS said net sales had continued in 2007 and might persist.
JEWELLERY DEMAND AT 15-YEAR LOWS
World gold demand fell by five percent to 3,906 tonnes in 2006 from a year earlier, mainly because of a 428-tonne slump in jewellery offtake to a 15-year low of 2,280 tonnes. Jewellery accounted for 58 percent of global gold demand last year.
"The chief architect of the decline was developments in the gold price, not only in terms of the absolute level but also the degree of price volatility," GFMS said.
Just three countries -- India, Turkey and Italy -- accounted for half the gross decline in total jewellery demand in 2006.
"Looking ahead to this year, price developments will remain a key factor in determining jewellery fabrication ... However, the decline this year, in percentage terms, is unlikely to match the 16 percent fall seen in 2006," the report said.
The report noted that gold dehedging accelerated last year, with a cut of 373 tonnes from the global hedge book. Total outstanding forward sales, loans and the delta hedge against options positions at the end of 2006 was at 1,364 tonnes.
Hedging allows producers to lock in prices for future output but can backfire if the market rises above the hedged price.
GFMS said gold dehedging might exceed 300 tonnes this year as producers were bullish.
Interest in gold exchange-traded funds and over-the-counter market also grew last year, but speculative activity in the main commodity exchanges declined. The gold market was dominated by institutional players and high net worth individuals, it said.