Australian research organisation Resource Capital Research, RCR, says that it expects gold to trade in the range of US$950/oz to US$1,000/oz in the next six months, supported by ongoing concerns over the US dollar, with the odd dash of inflation fear thrown in. However the consultancy feels that the fundamentals, particularly reduced crisis-driven investment demand, do not suggest the price will sustain the push through US$1,000 an ounce. Thus it sees more risk on the downside towards US$900/oz if equity markets continue to rally. RCR reckons that inflation is not yet real enough to be a sustained driver of gold but this may well change by the second half of 2010 when it may well have a positive impact on price.

RCR says that the almost 10% rally in the gold price from its early July low of US$909 an ounce has been driven primarily by a weakening US dollar, but also helped by sporadic headlines regarding future inflationary risks.

In the last three months the US dollar, RCR points out, as measured by the Trade Weighted Index of major trading partners, has fallen by 6%. Equity markets have been rallying strongly (The Morgan Stanley World Index is up 18.9% in the last three months) which suggests that 'crisis-driven' safe haven buying, which was prevalent early in 2009, is not a key driver of the gold price. Gold prices for producers in Australia and Canada are seen as having gone nowhere in the last three months due to commodity-linked currency appreciation.

With improved equity market performance and reduced banking sector fears, flow of funds into gold backed Exchange Traded Funds (ETF's) fell dramatically (down 88%) to 57 tonnes (gold equivalent) in 2Q09, after record 465 tonne inflows in 1Q09. Fortunately the slack was taken up by a rebound in jewellery demand (up 17% 2Q09 vs 1Q09). Much less scrap gold coming on to the market (down 41% in 2Q09 vs 1Q09) also supported the gold market fundamentals.

This cautious view does not take account of some other factors which seem to be driving the gold price at the moment though. The strength, or otherwise, of Chinese investment demand is not noted in the summary and with China possibly predicted to overtake India as the world's leading gold consumer within the next year, and with other eastern gold demand hotspots appearing, demand fundamentals may indeed be improving.

But the fact that RCR sees pretty limited downside in the near future is also significant in the overall market context. If big gold consumers like India, where the market has been seen to be very much price driven, begin to feel downside is actually limited, then sales are likely to pick up whatever the price in a fundamentally gold-oriented investment community.

The Resource Capital Research report covers 15 exploration, development and production companies in the September 2009 Quarter Gold Company Review with a focus on Australia.