With indications that the U.S economy may be heading into a downturn, gold appears to be at a crossroads. On the one hand, slower growth would hurt demand for commodities, including gold, and reduce gold’s allure as a hedge against inflation. On the other, a lower U.S. dollar is almost always bullish for bullion.

To add to the conflicting signals, gold staged a spring rally to US$725 an ounce, only to settle back into the US$550-US$600 range over the summer and early fall. The correction surprised many gold bulls who had thought the combination of continued unrest in the Middle East, the buildup to the marriage season in India and a lull in interest rate hikes in the U.S. would send the metal higher, not lower.

Still, the consensus among gold analysts is more bullish than bearish heading into 2007.

According to the latest update by London-based Gold Fields Mineral Services Ltd. , an authority on the gold market, investment demand will drive the price of gold back up past the US$700 mark in the last quarter of 2006 as investors seek a safe haven for their money.

The renewed demand will be driven by three factors: the bleak outlook for the U.S. economy and, therefore, the US$; continued volatility in the Middle East, which will keep the price of oil relatively high; and the perceived threat of global terrorism, which will add to the overall sense of unease.

“Given the US$’s poor fundamentals, rising energy and commodity prices in general and increasing geopolitical tensions, the case for gold remains powerful,” GFMS says in the update. “Given the widening investor base for commodities, the potential weight of money that could enter the gold market is immense.”

Martin Murenbeeld, a Dundee Wealth Manage-ment Inc. analyst in Victoria who has a long-standing reputation for accurate gold price forecasts, is also bullish on gold. He says there is a 50% probability that the price of gold will exceed US$700 in 2007, with an average price of US$755 for the year.

Murenbeeld told investors at the Denver Gold Forum in September that he believes the market is entering the sixth year of a bull market that will last at least a decade, based on his analysis of gold price cycles dating back to 1800.

But, he says, in the shorter term, there are two factors that could upset the current uptrend: mone-tary tightening and a recession that could reduce inflationary pressures and demand for commodities.

All other factors are bullish, Murenbeeld says. He believes the US$ will continue to fall — by as much as 35% — because of the country’s ballooning trade and current account deficits, both of which are at all-time highs. He also thinks governments worldwide will deal with increasing budget deficits by printing more money, spurring inflation and making gold more appealing.

He also believes Asian central banks — which now hold a collective $2,500 billion in foreign exchange reserves, mostly in US$ — may be encouraged to diversify into gold. OPEC, overflowing with petrodollars because of the spike in the oil price, is also a candidate for gold purchases.

“I think some dollar diversification is inevitable,” says Murenbeeld. “Theory argues it should happen, and geopolitical factors suggest it will happen.”

He calls gold “cheap” because, in constant US$, the price has risen just to its average over the past 25 years of US$312 an ounce.

Murenbeeld is in agreement with other gold bulls when he points to simple supply/demand fundamentals as another price mover. Medium-term supply is limited because it takes years for gold producers to respond to a price increase — especially today, as there has been so little exploration and so few deposits found in the past 20 years.

Meanwhile, demand from retail investors and fund managers is increasing. In 2005 alone, 208 tonnes of gold were added to the five exchange-traded funds that hold gold bullion. In the first quarter of 2006, ETFs bought up more than half that amount again.

GFMS believes expectations of weakness in the US$, combined with inflationary pressures and unrest in the oil-producing nations of the Middle East (the double whammy of a higher oil price mixed with fear), will keep gold investors returning for more.

Similarly focused on fundamentals is John Embry, chief investment strategist at Toronto-based Sprott Asset Management Inc. He believes the supply/demand gap, an increase in mining costs and shrinking central bank reserves, combined with currency deflation and ongoing geopolitical troubles, will prevent the gold price from slipping to the US$500 mark for a long time.

@page_break@From the traditionally bearish side of the equation comes Jeffrey Christian, head of New York-based metal consultants CPM Group. He has moved over to the bull’s camp — at least, in the short term.

Although Christian doesn’t see the U.S. moving into a recession, he thinks gold will be driven higher by investors looking for a safe haven from an upcoming “dirty” political season in the U.S., the renewed threat of sanctions in Iran and more trouble from hot spots such as North Korea and Venezuela.

“We would not be surprised to see the gold price rising to US$732 an ounce, where it peaked in May, and even higher,” he says. “Part of that depends on what happens, economically and politically. We still have a very unsettled international political world.”

So, even though gold seems to be heading for higher prices in 2007, nobody knows when this will happen or for how long it will remain the case. Investors had a shocking reminder of the metal’s price volatility when it plummeted to US$559 in early October, when demand is usually high heading into India’s marriage season, from US$640 in early September.

Gold investors, fasten your seat belts. It’s going to be a bumpy ride. IE