Gold fever rages on despite the metal’s 24% jump in a month to 26-year highs followed by an even faster retreat.

“This is a serious bull run. Those people who think it’s a bubble ready to burst might be disappointed,” Tony Dobra, director of global commodity derivatives at Standard Chartered Bank, said.

Analysts see gold marching towards May's peak of $730 a troy ounce after consolidating its position in the near term and reaching the previous record high of $850 in the coming years.

And they have ample arguments to support this - a weak dollar outlook, fund diversification, geopolitical tensions, inflation worries, poor mine supplies and safe-haven buying.

“The fundamentals that brought the investors in and made it attractive have not diminished,” said New York-based Paul McLeod, vice president of precious metals at Commerzbank.

“After we get through the summer, which is traditionally a quiet period for metals, we will see the re-emergence of the buying interest from investors.”

Gold tumbled 26% to $543 on June 14 from its peak in mid-May as a rise in the dollar, weakness in oil prices and easing political tension in the Middle East triggered a selloff.


“The correction was much needed and it’s just in time,” Dobra said. Delegates attending a precious metals conference of the London Bullion Market Association (LBMA) in Montreux, Switzerland, has predicted that gold prices would be at $698.60 an ounce by November 2007.

The forecast, compiled electronically from the votes of about 150 delegates including bankers, analysts, producers and funds managers, is about 35% higher than gold’s price at the start of the year and 60% more than a year ago.

So what makes the sentiment so bullish? “I believe the stature and reputation of the dollar as store value has been greatly diminished and undermined over the past decade,” Anthony S. Fell, chairman of RBC Capital Markets, said.

“Investors forget that bear markets start when the skies are blue and bull markets start when there is despair and apathy in the air,” he told the LBMA conference.

Analysts say that despite short-term spikes, the dollar was expected to fall in the long term and the Federal Reserve might reduce interest rates after raising them in the short-term.

Gold prices generally move in the opposite direction to the US currency as the metal is often considered as an alternative investment. A drop in interest rates prompts investors to shift to other assets from currencies for better returns.

Funds, which were instrumental in driving gold higher during the recent rally, have not lost confidence in the market and pension funds are considering diversification into commodities.

“Some diversification hasn’t happened yet but will happen at some stage,” said Michael Widmer, analyst at Macquarie Bank. “People are waiting at the moment to move back into the market.”

Cyrille E Urfer, head of fund research at Lombard Odier Darier Hentsch, said pension funds would continue to increase their allocation to asset classes such as commodities that were not common in the last couple of years.

“You will see much more investment demand. They are looking at the possibility to make their portfolio more robust and they are going to be more medium- to long-term investors.”

Safe-haven gold is also likely to get a boost from the situation in the Middle East and signs that North Korea might test a long-range missile.

“There are still tensions in the Middle East, you have got the issues with the American economy. It won’t take much of a spark to re-ignite the gold price again,” said Jeremy Charles, managing director of precious metals at HSBC Bank USA.