Gold prices seen strong in 2007 and 2008

LONDON (Reuters) - Prices of key precious metals will surge this year and next because of contracting mine supply, an expected decline in the dollar and lower sales by Europe's central banks, ABN-AMRO said on Thursday.

Average gold prices were likely to jump to $695 an ounce in the current year and to $740 in 2008 from $604 last year, it said in its latest Global Mining report.

ABN-AMRO saw average prices of platinum rising to $1,275 an ounce this year and to $1,345 next year from $1,142 in 2006. Palladium was forecast to average $375 in 2007 and $425 in 2008 from $320 last year.

"We have retained our enthusiasm for the market outlook for gold ... The market has seen that the gold price can exhibit extreme price volatility," it said.

Spot gold was quoted at $645.40/646.40 an ounce by 1:16 p.m. Platinum was at $1,213/1,218, while palladium was last at $348/353 an ounce.

Supporting themes were a dollar weakness, positive supply-demand fundamentals underpinned by constrained mine supply, demand growth, geopolitical tensions and the fact that signatories to the European gold agreement were unlikely to meet their full 500 tonnes a year allocated gold sales, it said.

"We forecast France will be the main seller with 600 tonnes, having already disposed of 250 tonnes in the first two years of the five-year plan. France, Spain, Portugal and the European Central Bank are likely to be the main sellers."

Europe's Central Bank Gold Agreement (CBGA) was first negotiated in 1999 to stabilise prices when gold was languishing below $300 because of the attraction of other investments.

The second pact, agreed in 2004, raised the limit on gold sales by its 15 signatories over five years to 2,500 tonnes at a rate of 500 tonnes a year, from 2,000 in the previous 1999-2004 period.