GFMS sees a quick rebound in the gold price

LONDON (Dow Jones)–Gold should rebound above $900 and possibly above $950 a troy ounce in the coming months as the dollar’s temporary strength fades amid further fallout in the U.S. economy, London-based metals consultancy GFMS Ltd. said Wednesday in its 2008 gold survey.

“I’d be far from surprised if we see a further bank failure or two in the next few months,” said GFMS Executive Chairman Philip Klapwijk. “Add that to an unwinding of dollar gains, and you should see gold back over $900, and maybe $950″.

GFMS said the dollar should return to its downtrend given rising U.S. unemployment, possible “slips in confidence” in the U.S. government’s creditworthiness and the unlikeliness of a narrowing between the U.S. and euro-zone interest rate spread.

But the conditions that drove gold to its peak above $1,000/oz in the first half – record high oil prices, low U.S. interest rates and falling equity markets – are no longer present, which should rule out record highs for the remainder of the year, the consultancy added.

GFMS foresees gold prices remaining at elevated levels on the strength of strong investment demand and supportive fundamentals, characterizing the liquidations of the past few months as a selloff driven mostly by short-term players.

Implied net investment swung to over 200 tons in the first half, compared with an implied disinvestment of nearly 180 tons in 2008. Bar hoarding dropped 10%, largely due to high prices in India and liquidation in Japan. In total, world investment – the total of implied net investment, coin demand and bar hoarding – was up nine-fold on year, largely due to the large increase in implied investment.

Central bank selling, which fell by over a quarter in the first half and indirectly supported prices, should drop even further in the second half. “That should not only provide direct support but also reassure longer-term investors,” Klapwijk said.

Fundamentally, the gold market should see a rebound in jewelry demand in the second half of the year, as buyers postponed purchases in the first half because of high prices and price volatility. Jewelry demand fell by nearly a quarter in the first half, with a drop in India accounting for over 60% of the total decline.

Mine production struggled in the first half of the year, falling over 70 tons on year, led by lower output in Indonesia, as well as South Africa, Australia, Canada and the U.S. At the same time, production costs rose 20%.

One possible bearish development for gold prices will likely be a drop in de-hedging from gold producers. The gold market could “sorely miss” the support from de-hedging, which is forecast to be far lower in the second half of 2008.