Gold could rally through $800/ounce says GFMS's Walker

Investor demand will grow in the second half of 2007.

JOHANNESBURG - 

Gold has the upside potential to rally through the $800/ounce level if current imbalances in the global economy and the credit crunch became more severe.

Chief executive of specialist precious metals analysts,GFMS, Paul Walker said today on the CNBC Power Lunch with Moneyweb/Mineweb that a gold price over $800/ounce was on the cards if the US sub-prime credit crisis diminished people's confidence in the US dollar and other investment asset classes.

"If this unravels dramatically, then the metal at least has the potential to rally through this level."

Commenting on the gold price's recent surge through the $700/ounce level, Walker said there was downside risk in the short-term, but still upside in the price.

"The story of underlying gold fundamentals has pretty much been the same over the last two years, it only manifested in a higher gold price recently."

Walker said the gold price was at high levels compared to a few years ago as investors considered the bubbles that have grown in various asset classes over the last few years as well as fundamentals in the global economy.

"Certain investors have turned to gold and no longer have exposure to paper only."

Walker believes that global imbalances have manifested in the sub-prime crisis and is starting to show itself in the gold price now.

Asked whether the average gold price underpinned the market or whether investors should tread carefully, Walker said that producer margins have not increased with the stronger price as it has been accompanied by steeper costs.

However, higher costs have pushed fringe producers out at the same time and gold production will at best be steady over the next few years.

Investment demand for gold will rise in the second half of this year as GFMS believed the US was heading for a recession.

Walker said this would have a knock-on effect on the rest of the commodity complex and hit gold in the short-term.

Upside for gold this year is estimated at between $750-$760/ounce, while potential downside is seen to be only around$20 and not $50/$60/ounce.

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