Gold price 'to rise despite rate hikes'

SYDNEY - Gold prices were likely to rise further this year on solid investor demand, despite the negative pressure being applied by expectations of rising US interest rates, Australia's largest bank by assets said yesterday. National Australia Bank has revised its forecast gold price upward by 11 per cent to an average US$633 an ounce in 2006 from US$568.3 previously. The bank pegs gold at US$752.50 an ounce in 2007, up 24 per cent from its earlier forecast of US$607.50.

For the first five months of 2006 gold averaged US$590 an once, a year-on-year increase of 38 per cent.

Bullion has been on a mostly downward track since peaking at US$730 a ounce on May 12, a decline analysts have blamed on a stronger US dollar, widespread views that US interest rates were going up and lower jewellery consumption. Spot gold last cost US$581.20 an ounce.

Investors tend to shy away from gold when rates are rising because they can get better returns elsewhere.

"Despite these factors, gold investment demand should remain the key driving factor in coming months, supported by geo-political tensions, high energy prices and incentives to diversify away from US dollar assets," National Australia Bank sector economist Gerard Burg said in a report.

The US Federal Reserve was expected to lift its key funds rate for a 17th straight time overnight to 5.25 per cent from 5 per cent.

Burg said while supplies of gold were rising modestly around the world, declining output from world number one producer South Africa was lending price support.

* Newcrest Mining, Oxiana and other Australian miners are likely takeover targets, as demand for raw materials continues to outpace supplies, Goldman Sachs JBWere said.

Miners are finding it harder to find or buy good assets, which could spur takeovers within Australia or from overseas, Goldman analysts Malcolm Southwood and Ian Preston said in a June 27 note.

- REUTERS, BLOOMBERG