Global Forecast- 1997

Ted Arnold

Merrill Lynch & Co London

Gold

Range: $330-$390

Expect a much more volatile year for gold in 1997 - now that it has finally broken out of its option stranglehold. The clear message is that we are heading south. On the supply side, there is and will continue to be increased potential for selling from central banks and from South African producers. If and when they feel the Rand has stabilised, they can be expected to sell into any significant dollar rally to lock in their dollar price.

On the demand side - there doesn't seem to be much chance of producer buybacks in volume. Physical demand from the West being unlikely to stage a resurgence, this sector is heavily dependent on Asian/ Middle Eastern/Indian jewellery offtake which, it must be remembered, is all very price sensitive. Any substantial rally is likely to result in rapid disinvestment, such as we have already seen in the past. This year has seen an overall decrease in demand of 15-17% as gold has become expensive in local currency terms. Gold is a buyers' market - and while they can be expected to stand back and wait for the price to come to them, at some point they will help stabilise the market and help it to form a new, lower range.

Silver

Range: $4.00-$4.90

Indians have had the strongest appetite for silver, taking in roughly 20% of all demand, and it looks like they are starting to have indigestion. The last monsoon was not great, and the economy appears to be slowing down, all of which will lead to consumer caution. Indians are very price sensitive and could already be seen backing off at $5.25 in 1996. Look fora coming increase in supply as new copper mines due to come on line in Chile will boost silver production as well. Increasingly, rallies over S5.00 will bring out both primary and secondary producer selling. Silver is a commodity with considerable oversupply and the market will have to find the right level to draw demand out.

Bruce lkemizu

Mitsui &. Co. Tokyo

Gold

Range: $ 350-$ 390

We think gold is still out of focus of the speculator's interest. We are seeing small but steady physical demand out of our area, so hopefully this will support the market. There seems to be not much reason to look at the upper side, but if the NY stock market, which looks as if it has no ceiling, crashes (or at least sees some correction on its price rise), gold may have a chance to see the $390s. But again, it looks unlikely. Furthermore, many Australian producers are eager sellers if Aussie gold comes back at all from its historical low prices. We just say there is always more gold than we really need. Basically, we expect just another range-bound year, only lower.

Silver

Range: $4.20-$ 5.20

Silver could be a bit choppier than the gold market. We see good physical demand below the market from film makers, and would expect a steadier market.

Andy Smith

UBS London

Gold

Range: $350-$400

'Been down so long, looks like up to me' seems gold's best hope in the early New Year. For everything that could go wrong did go wrong in 1996: producers buying back their hedges only to see prices fall central banks selling and the market selling the rumour of more (EMU-linked) official sales, and the perpetual growth machine of physical demand stalling badly. Beyond a New Year blip - sharpened perhaps by the current silence of the bulls and call -option positions above the market - and EMU postponement is the best chance of avoiding the abyss (paranoia over official sales could ease, a little). Without a little help for le continent, rallies will be sold, hard.

Silver

Range: $4.25-$ 5.2 5

As to silver, there is no reason, in principle, why it should suffer the structural fatigue of gold permanently heightened fear of official sales: silver gave up its monetary pretensions a century ago. But silver is suffering speculative fatigue - repeated, abortive attempts to conjure itself through $6. The Indian rope trick - nine favourable monsoons boosting demand - is also now longer than the proverbial piece of string. And despite vacuous talk of gaps, low lease rates suggest more liquidity than the average brewery. Still perhaps a better each -way bet than gold for the perennial Wall Street bears.

Brendan McCarthy

MKS Finance SA

Sydney

Gold

Range: $345-$390

Our outlook for gold in 1997 is from an intraday / short-term trader's perspective: little economic research, supply/ demand analysis or technical viewpoint.

The last quarter of 1996 saw the gold market weakness reacting to fears or expectations or central bank sales, producer selling and little sign of global inflation.

The inflation argument has some merits, and producer selling will be there, but central bank selling and the related talk of Maastricht and gold becoming just another commodity, losing its reserve currency premium, is the real fear during price weakness.

If gold is to be sold, must it be done this year or lose it forever? This fear will probably spill over into early 1997 until the markets begin to question its validity. Can we really believe the European process will suddenly transform hundreds of years of history into a single currency? Even if it does, what can we say of a system that would allow central banks to sell hard gold reserves to fudge the national books in order to meet strict entry requirements.

The lower price expectations of producers and this fear we sec as lowering the upper side of" gold range for 1997 to $390. The spill over of Fear into the first quarter or 1 997 leads us to believe that the low side of a range will be tested and established initially at $345, before questions about current fears and their validity are asked.

Higher oil/energy prices are a reality of the past 18 months and these cannot be absorbed forever. Consumption fundamentalists will prevail: investment jewellery demand is good and looks to get better. India continues with its run of good monsoonal seasons; large populated Asian countries are where real sustained economic growth is occurring and looks set to continue well into the next century; and higher oil prices have brought increased revenue to the Middle East. These will take check and see us testing the upper boundary of our estimated range of $390 by last quarter 1997.

David Giese

Smith Borkum Hare Merrill Lynch Johannesburg

Gold

Range: $350-$400

Apart from a short period at the beginning of 1996, the gold price in US dollar terms has been on the decline. I do not believe that this trend is likely to continue in 1997, but the price could stabilise around the year-end price and trade in a band of between $370 and

$385 per ounce. This does not remove the possibility of the price collapsing to around $350 (or lower!) or spiking to $400 per ounce (or above!), but the seven-year mean of $372 per ounce is a reasonable basis. Rumours of continuing central bank selling connected with restructuring in the European Union, declining Chinese interest, world demand exceeding supply and low levels of inflation in the major economies should ensure that the gold price does not move too dramatically in either direction.

As a major producer, South Africa's supply to the market is expected to consolidate around the level of 500 to1mes for 1997, before commencing a gradual increase as new production from developing mines becomes evident. The improving labour relations in the gold mines, coupled with black ownership of a significant South African gold mining company, Johannesburg Consolidated Investments, should remove speculation about a further cut in gold output from South Africa.

ln addition to the above­mentioned factors, low price volatility in a balanced gold market should assist to maintain a flat gold price during 1997.

Tom Griffo

Cargill Investor Services, Inc. New York

Gold

Range: $350-$390

With gold prices sitting at three-year lows, bearish sentiment is understandably strong. Sales by producers are said to be heavier than usual as miners have seen the $390,

$380 and $370 levels all fall by the wayside. Meanwhile, with world financial markets seemingly setting record highs almost daily and inflation a non-story, investor interest in gold is poor, to say the least.

Further, the market is now awash with speculation that European central banks will soon sell gold in order to meet the debt criteria of the pending European Monetary Union. This threat - real or imagined - is probably the single biggest factor behind the gold market's most recent woes.

So, what's next?

Before gold can break out of its current depression, the aforementioned issue of central bank gold sales must be resolved. Until or unless the European central bankers make a policy statement about their gold holdings related to the pending EMU, gold's upside will be extremely limited. Ironically, the gold market has shown that it can efficiently absorb official sales, especially since the sellers have usually been extremely prudent in their operations: what the market cannot deal with is the w1certainty surrounding the details of any such sales.

Gold is therefore likely to gravitate toward $350, although the sheer magnitude of the short position held by the funds suggests a $10 short-covering rally is possible in the interim. Unless there is an unforeseen change in the fundamentals as depicted above, the $385-$390 area would appear to be an optimistic projection for the upside of this troubled market over the next three to six months.

Silver

Range: $4.50- $5.50

Given gold's rather uninspiring outlook, can silver be expected to perform any better? Well, unlike gold, silver is unencumbered by fears of producer or central bank sales. And while silver has a well-documented stock overhang, the market, for the most part, has long discounted this surplus (which has been significantly reduced over the past several years). furthermore, silver inventories are generally not viewed as a source of ready supply at current low-price levels. Meanwhile, physical demand should remain steady, reflecting the generally healthy state of the G7 economies, and it seems reasonable to expect India to offtake to continue to be strong.

Still there is simply too much historical linkage between the two metals to conceive that silver and gold prices could trend in opposite directions. The two are married, for better or worse. Therefore, a range of $4.50 to $5.50 is plausible for silver looking out three to six months.

Hanspeter Hausheer

SBC Warbuig

Zurich

Gold

Range: S360-$390

After three years with rather disappointing developments in the gold market, if we exclude January and February 1996, there are reasons to believe that not much will change in 1997. I expect the gold price to remain in a range between $360 and $390.

Although the economic recovery in the G3 countries will have some upward impact on inflation, especially in the USA, where growth is already above inflation-neutral levels, the possible price effect on gold will be compensated by ongoing fears over possible sales from central banks. On the other hand, producers seem quite satisfied with the present gold price level, especially those with total production costs around S300. Overall, there will be more attractive alternatives to gold for investments in 1997.

Silver

Range: $4.60-$5. 80

I have a more positive opinion on silver than on gold. Since silver fundamentally is an industrial metal, it should profit from the economic recovery worldwide. In addition, contrary to gold, there are no big potential sellers looming over the silver market. Furthermore, silver has proved in the past to be the most volatile of the precious metals.

For these reasons I give silver a good chance that it can loosen its close tie to the movements in gold, which has been the case in the past, and go a more independent way. Price-wise, I expect to see a range between $4.60 and $5.80. Considering the present level of $4.80, the risk is clearly to the upside.