Gold could hit $975/oz, silver $17.90/oz:

Gold prices are forecast to hit a peak of $975/oz in 2008 on positive fundamentals, less central bank selling and stagnating production, according to precious metals and technology group Heraeus, in its Precious Metals - Outlook 2008. Silver prices could climb as high as $17.90/oz in the first half of the year as demand from many industrial applications and investors grows, the report added.

"Investors will most likely continue to diversify their portfolios, and gold will clearly play a role here as an alternate asset-class," Heraeus said, adding that if only the Germans were to allocate 5% of their Eur4.7 trillion ($6.8 trillion) near-cash assets to gold, they would be buying up an equivalent of six years' annual production.

The report forecast bullion to reach a high of $935/oz in the first quarter of 2008 and a year's high of $975/oz, but it predicted gold's peak in 2009 would be only $815/oz. This compares to a high of $848/oz in 2007. Looking at the lows, Heraeus predicts a low of $840/oz in the first quarter of this year, a low of $740/oz in the whole of 2008 and a low of $650/oz in 2009. The low in 2007 was $601/oz, according Heraeus.

Heraeus warned that the "party" could not go on forever and already the second half of 2008 could see things "calming down on gold's front should a recession in the USA firmly set in and as a result the price of oil comes off substantially." It also could not be ruled out that mining companies at some stage might decide on fresh hedging, the report said. "All this could have the gold price dropping down to under $700/oz by 2009," Heraeus said.

Forward contracts as a hedge strategy for industrial end users, at present price levels, cannot be really recommended, Heraeus said. Instead industrial end users should, even in this tendencially upward trend, wait for a pullback, which should then provide a much better buying opportunity, the company added.

"What makes hedging currently additionally unattractive is a relatively high interest-driven premium (contango) in the forward purchase price," Heraeus explained. "Though this would please mining companies (if they find the courage to sell forward), it is an added burden to the industrial buyer." A 2.5-year forward gold purchase, for example, would today cost about $90/oz over the spot price, leading to a final price relatively close to $1,000/oz, Heraeus said.

Silver could reach Q1 high of $16.75/oz

Silver is forecast to rally to $16.75/oz during the first quarter of 2008 before reaching the year's high of $17.90/oz, then decline to a peak of $15/oz in 2009. This compares with a high of $16.21/oz in 2007.

Looking at the lows, Heraeus predicts a low of $14.75/oz in the first quarter of this year, a low of $13.50/oz in the whole of 2008 and silver falling to $11.00/oz in 2009. The low in 2007 was $11.06/oz, according Heraeus.

Heraeus warns that demand from the photographic industry is expected to decline further in 2008 and 2009 and that new production would offer a growing supply of silver available in the market. Silver supply is forecast to grow at 3%/year as a result of higher byproduct output from increased base metals production, the report said.

In addition to the 25% produced by the primary mines, silver is a byproduct, among others, of gold, copper and lead production. Currently annual new silver production is around 20,500 mt, and a further 7,800 mt comes from silver scrap and official reserves, Heraeus said.

On the demand side, silver has enjoyed growth in new applications. "Relatively new applications for silver, though with comparatively low demand volume, but with enormous growth-potential, were in the plasma-screen segment, solar industry, RFID-sector and water-purification processes. All four areas promise an increasing demand for silver in future," Heraeus suggested. The high price of silver has cut back demand for silver from the jewelry and silverware markets, it said, adding: "In 2008 we expect a further decline of around 5% within this segment."

Heraeus said in its report that in view of a longer-term restrained scenario it would not recommend entering into silver price hedging at the current levels. "In comparison to that staggered forward purchases, starting at the $15/oz level, appear to be a more promising strategy," it noted.

Silver's high volatility makes it feasible to consider selling put options, it added. "Though this way the industrial end user does not get any protection against fast rising prices, he can get however a decent price-subvention on his running demand through the premium intake," Heraeus noted.

SOURCE;http://www.platts.com/Metals/highlights/2008/mp_mw_012908.xml