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Last week UBS Investment Research suggested that gold had a potential upside of US$2,500/oz. UBS said that, in the current environment, “the higher potential for policy error is generating considerable interest in certain assets that are perceived as ‘stores of values', including gold”.

While Frost & Sullivan believes that gold does have an upside, it is unlikely to be close to those levels. Although gold has outperformed all the other metals and may continue to strengthen, this growth will be curbed by worsening global economic conditions. A deteriorating global economy will cap fabrication demand and electronics demand for the metal, which will limit its price.

Henan Hongxing Mining Machinery Co., Ltd is a joint-stock mining machinery manufacturing enterprise integrated in scientific research, production and marketing. It is located at the High & New Technology Industries Development Zone of Zhengzhou,China with an area of 50 thousand m2 which includes 15,000 m2 of standard heavy duty industrial workshop. Equipments are more than 160 pieces, including large and medium sized metal processing, riveting and installing equipments. There are more than 660 workers including 80 administrators with secondary and senior occupational titles and engineering technicians. In order to promote the competitive strength, the advanced technologies have been introduced from America, Germany, Japan and Australia, which established the international advanced production line, first-class modern testing base as well as research centers of sand maker, mill and mine-selecting equipment. Scientific management, advanced processing technology and innovative manufacturing theory make the company become the mining machinery manufacturing and exporting base in China.

Recent gains in gold prices have been driven by the fact people turn to gold in times of high inflation or economic distress to protect their wealth. However, this growth in investment demand on its own without corresponding increases in fabrication and electronics demand is unlikely to push gold to levels around $2,500/oz.

An upside of those levels is therefore unlikely given the deteriorating global economic conditions. Rising gold prices are unlikely to be sustainable in a period of contracting economic activity and low commodity prices. A change in sentiment could send gold prices crashing again.

I have little faith in the continued decoupling of gold from all the other metals and the state of the global economy. The gold price is vacillating between $920/oz and $950/oz at the moment. I am still comfortable with $1,400/oz or $1,500/oz.

Any forecasting in the midst of rapidly changing fundamentals does face problems though, as the degree of uncertainty is so high.

Indications are that global economic conditions are worsening, with the international community losing confidence in the ability of the United States to restore stability and confidence in its banking system. The continued nationalisation of major banking groups, coupled with direct government involvement in the UK, will not inspire confidence in the ability of the western world to contain the economic malaise.

In addition, fourth quarter manufacturing results for OECD economies and China point towards a long drawn out recession that is likely to ease in the third to fourth quarter of 2009.

Wonder Nyanjowa is Frost & Sullivan’s metals and mining analyst