Will gold go to $1,000 an ounce?

For the last five years I have been forecasting rises in the gold price and it has in fact more than doubled since Gordon Brown made his first gold sales.  Now the price has risen to $624 an ounce, a rise of almost 5 per cent in the previous week.  This has happened despite profit taking, though some profit taking is to be expected after any long rise.

There comes a point at which the gold price moves from being of interest only to the financial community and becomes of general public interest, perhaps of concern.  One can understand why this is so, if one looks at the main causes of the rise.  Gold has risen so far and so fast for these reasons, among others.

1. Fear of war with Iran.  Even the Iranians have themselves been buying gold as the ultimate currency of self protection.  More significantly, an attack on Iran would lead to a reduction in Iran’s oil exports.  That would push the oil price to $100 a barrel or higher.

2. The shortage of oil supplies, even if Iran does not reduce supply.  Oil has already risen to $75 a barrel.  The supply from Iraq and Nigeria is below normal capacity.

3. The weakness of the dollar.  The Federal Reserve Board has indicated that it does not expect to have to raise interest rates in the near future.  The US has a large Budget Deficit and an even larger trade deficit
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4. The growth of the Asian economies, particularly India and China, which have a strong tradition of private saving in gold.

I do not expect that there will be an attack on Iran, either by the US or Israel.  Jack Straw, the Foreign Secretary, has described it as “inconceivable”, and he is probably right.  The Americans cannot afford $100 a barrel for oil, which would probably cause a world recession.  Nor would US or British public opinion support another Middle East war.  However, I do expect gold to go on rising over time; it might well reach $1,000 an ounce by the end of the second term of President Bush in January 2009.

Comments

[Jason Stamper]

Sir, while I understand that the price of gold has serious implications for the world's economies - just like the prices of the Dollar, Yen and Pound - I find myself utterly incapable of worrying about how much a Krugerrand will set me back by 2009.

The day before yesterday was officially Africa Malaria Day, set aside by African governments "committed to rolling back malaria". Malaria kills more than a million people every year, and the vast majority are children under five.

Meanwhile every day, diarrhoeal diseases cause an estimated 5,483 deaths, mostly among children under five. Perhaps now that I have a child of my own I worry more about these figures, I don't know. I am sure that just as I do, you yourself care more about these figures than the price of an ounce of gold, too.

Readers of your blog can find out more about these two dreadful statistics at http://www.rollbackmalaria.org/amd2006/ and http://www.unesco.org/water/

Finally from one (initially reluctant) blogger to another, welcome to what I have gradually found to be a very rewarding and inclusive new kind of publishing.

[Gnoll110]

Well there are two ways to get gold to US$1,000 an ounce.

There is the supply/demand way. You know the prosperous Indians & Chinese buying more.

Then there is the 'Printing Press' way. Let me quote John Maynard Keynes.

"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens...Lenin was certainly right."

Will the US (keep) printing currency. How will history remember Ben Bernanke?

PS

Can we please turn the 'i', 'b' and 'blockquote' tags on.

[Canuck]

Oh, there's a third way gold will go past -- way past - $1000. It will be propelled by the short covering of a massive short position in the metal.

Do the Central Banks really have 15000 tonnes in stock? No. It's been leased out ( that means sold in effect ) and it ain't ever coming back anytime soon.

Have you seen what's happened to the copper shorts. Coming soon to a precious metal near you!

[Beauty]

While someone somewhere counts the profits from these movements, poor people die.

[Paul C Sandison]

Since gold has a highly debatable intrinsic worth as an income-producing asset in ingot form, it is today primarily an alternative investment when other choices dissuade. There are several reasons for the relative unattractiveness of traditional vehicles of investment in this first decade of the new millennium, and which can explain why investors have bought gold, pushing up prices to new historic levels.

Since the Nasdaq bubble burst in 2000, shares have been seen as more risky than at any time in the last 40 years, and the volatility and poor performance of the markets post-2000 have not improved this outlook. Investors have shied away from investing in shares because great gains and satisfying bull runs are now associated with the fear that anywhere approaching a top of the bubble can quickly switch into a terrifying bear run. Investors are human beings. It should come as no surprise that bull runs are now also associated with fear rather than pure joy.

Furthermore, the ability to move billions of pounds to other share markets in seconds means that the bourses are all interconnected in the minds of the investor. Investors daily monitor not only the local bourse but all the main ones. If all except one are negative that day, the uninformed investor can easily believe that the remaining one must soon fall in sympathy and can decline to invest in it. The concomitant effect is a dampening one on all markets.

In growing economies since 2000, residential property has come to be regarded as a more stable investment than shares, partly because of the greater tangibility of bricks and mortar, especially when compared to the gigantic losses into thin air which grimly take place in a prolonged bear run on the stock markets.

However, also for those who have not studied the long-term trends and potential for price growth in residential property in their countries, property price growth is tinged with the fear of future high interest rates and the past falling prices associated with the last housing price recession in their memory. This is enough to dissuade the investor who often has a pressing need to retain the value of hard-earned savings.

Investors prize stability before growth. When internal political uncertainty is brewing in a country or region, investors will hold off until the conflict is resolved, or invest elsewhere.
Property investors today also have to monitor the effect of how various governments manage their economies and exactly what the underlying monetary policies are of each respective relevant central bank regarding growth and inflation.

Pensions mis-selling, mismanagement as evidenced in Barings, corruption such as in Anderson, and expropriation as in Russia, plus a massive £5bn raid by the British Treasury on hard-earned pensions in the UK all make - the UK investor at least - desperate to park his savings some place where the devil and the anti-labour Labour Chancellor cannot reach. Since it is more difficult for the Chancellor to find those gold ingots and lop a good 50% off them, it remains an investment of choice.

Finally, today's investors get jittery as soon as there is any threat of geo-political conflict. Too many have already lost their life-savings in regional conflicts in Africa, Asia and south and Central America. So when global environmental catastrophes and/or an international war or a nuclear spat begins to loom too large and for too long, the gold price rises.

The high gold price levels we have seen in the post-2000 era can be well correlated with the beginning and progress of the war in Iraq. The gold price remains high due to the complete inability of the Allies to eliminate Saddam Hussein in Iraq without using war and through the prolonged and increasingly dangerous creation of another monster far bigger and far worse.

Should the world tomorrow see a sudden and definite move by all the major powers to reduce CO2 emissions by 50% in four to ten years, should the Middle East conflict be resolved without another major regional conflict somewhere else, and should there be the statutory imposition of new thicker insulation in all houses older than 10 years, plus the offer of tax-free concessions to encourage the building of wind, wave, thermal and solar power to supply the energy needs of all residential buildings in all the major economies in the world, the price of gold would sink like a stone.