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10:31 29Sep2003 RTRS-INTERVIEW-Merrill bullish on gold as investment demand rises
By Nao Nakanishi
HONG KONG, Sept 29 (Reuters) - Fundamentals, including stronger investment demand, point to even higher gold prices in the long term after a rally took the metal to a seven-year peak last week, a fund manager at Merrill Lynch told Reuters.
"We feel fundamentals have shifted... to being very supportive now of gold going to a higher trading range," said Evy Hambro, who runs the world's largest gold fund, MLIIF World Gold Fund, worth $1.5 billion.
"People are buying gold for investment purposes. We have rising gold jewellery demand... we also have declining supply," said Hambro, who is based in London as Director of Natural Resources of Merrill Lynch Investment Managers.
Gold spiked last Thursday to $393.30 per ounce as funds piled into the metal, inspired by a surprise OPEC decision to cut oil output and by a weaker dollar, which raised bullion's safe-haven appeal.
Analysts have said gold is looking to climb to $400 an ounce after a period of consolidation.
"They (investors) have a view the dollar is going to be weak... Gold is an efficient way to play a weak dollar," he said.
"Gold and the dollar have a strong negative correlation. Historically for a one percent change in U.S. dollar, you typically get minus 0.8-0.9 percent change in the value of gold."
Hambro estimated gold investment demand would surge to more than 400 tonnes this year from around 200 tonnes last year and a negative position the year before.
To diversify portfolios and cut investment risk, he recommended a minimum allocation of three to five percent for gold."If you had an outlook that was positive on gold...if you want to play that up, you should have considerably more."
NEW CENTRAL BANK ACCORD?
Asked about dehedging by big producers, which some analysts say is falling and may undermine prices, Hambro said:"The amount that people are closing out their books is actually increasing. The forecast for this year is 420-430 tonnes."
The fund manager said Merrill Lynch had revised upwards its 2003 estimate from 380 tonnes initially. It compared with 400 tonnes last year, 200 tonnes in 2001 and about 20 tonnes in 2000.
Unwinding of shorts by producers should help absorb any increases in gold sales by central banks, which have begun talks on renewing the 1999 Washington Accord which limits total annual sales to 400 tonnes through September 2004.
"It will be slightly more gold than today in terms of the annual cap. Maybe it will be up to 500 tonnes," Hambro said.
"(But) if there was an increase in supply by 100 tonnes, it doesn't really make that much difference. It can be easily absorbed," he said.
As a bullish factor, he identified liberalisation of the gold market in China, the world's number four consumer of the metal.
"The opening up of China for gold consumption for individuals again has potential to raise Chinese demand for gold... There's lot of savings in China held in cash," he said.
Asked about talk China might buy gold to ease pressure on yuan, Hambro said:"The People's Bank of China announced in December last year they had purchased 100 tonnes...It is one way to resolve the problem."
Hambro also expected more funds to flow into gold if the World Gold Council, an industry group funded by mining companies, succeeded in introducing exchange traded funds (ETFs) and other gold-backed securities.
"It has the potential to be hugely positive for gold demand," he said, adding it would attract pension funds that have been prevented from investing in physical commodities, such as gold.
((Reporting by Nao Nakanishi, editing by James Poole; Reuters Messaging: nao.nakanishi.reuters.com@reuters.net; +852-2843-1652))
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Monday, 29 September 2003 10:31:49RTRS [nHKG136187] {EN}ENDS
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