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What's next for the soaring price of gold?

Section: Daily Dispatches

By Alexandra Goss
The Times, London
Sunday, December 20, 2009

Gold has glittered particularly brightly this year, soaring to a record high of $1,226 an ounce at the beginning of this month. Despite dropping back since then and finishing the week at $1,110, the gold price has been one of the star performers of the decade, having risen more than 300% since 1999.

Private investors in particular have piled in as a hedge against the financial crisis, the weak dollar and fears that central banks printing money will lead to a spike in inflation.

Demand for 1-ounce American Eagles, the world's most popular gold coin, has been so strong the US Mint ran out last month. Meanwhile, Harrods, the department store, recently started selling gold bars and said demand had been well ahead of expectations.

However, half the fund managers surveyed for the Bank of America Merrill Lynch Global Research report, published last Wednesday, said the precious metal was now overvalued and would fall next year.

The figurehead for the "bullion bubble" argument is Nouriel Roubini from New York University's Stern School of Business, who warned last week that prices face "significant risks of a downward correction."

"The recent rise in gold prices is only partially justified by fundamentals and is, in part, a bubble that could easily burst," he said. He added that there was "little reason" for bullion prices to rise rapidly toward $2,000 an ounce unless the world enters a period of high inflation or slips into a depression -- neither of which he thinks is likely.

Here, we examine the arguments:

... Gold Bulls

Many analysts are positive that the gold price will continue to rise, citing strong market fundamentals.

Catherine Raw, fund manager in Black Rock's natural resources team, said: "The gold mining industry is struggling with production -- it has fallen 8.7% since its peak in 2001."

Bill O'Neill at Merrill Lynch Wealth Management thinks bullion will hit $1,500 in the next 18 months, driven up by a combination of continued credit risk, US dollar weakness, and commodity market strength. He said: "Although the gold price may be volatile in the short term, the long-term trend is upward, and investors should take advantage of any dips to increase their holding."

Others also point out that gold is not obviously overpriced compared with its own previous highs in real, inflation-adjusted terms (gold hit a high of $2,200 an ounce in 1980). Exchange-traded funds that track the gold price have been popular with private investors, with $80 billion now invested in the schemes.

However, Ben Yearsley at Hargreaves Lansdown, the adviser, favours gold miners as their share prices have lagged the gold spot price. Over the past three years, the FTSE Gold Mines index has underperformed the spot price by 22%. He tips the Black Rock Gold & General fund, which invests in miners.

... Gold Bears

Other analysts say the bullion rally is unlikely to continue at such a pace next year.

John Greenwood at Invesco Perpetual is "hesitant" about making any further commitment to gold.

"Although commodities do tend to rally at the beginning of a business cycle upswing ... the fact is you don't get any yield on your gold," he said. "The underlying presumption is that gold is an insurance against catastrophe and I don't think that we are going to have that catastrophe."

Julian Jessop at Capital Economics, the consultancy, also believes prices will fall in the coming months as the dollar recovers. He forecasts prices to dip to $950 by the end of 2010.

Meanwhile, officials from China and South Korea, two countries where central banks have been enthusiastic buyers of gold this year, are reported to have said that prices are now too high.

Stuart Thomson at Ignis Asset Management believes the gold price will continue to rise throughout the first quarter of next year, peaking at close to $1,250 an ounce. However, he thinks it will drop back to $985 by the end of 2010.

"Global growth is recovering from the Lehman's collapse and we expect stronger US growth to force a shift in US central bank policy during the first half of the year, reversing the currency's decline and causing gold to slide in the second half," he said. "In a world of heightened macroeconomic volatility, gold bugs will have to be nimble to prosper in 2010."

Adrian Lowcock of Bestinvest, the adviser, thinks gold could well hit $850 by the end of next year and recommends investors have exposure via a broad commodities fund, such as Investec Enhanced Natural Resources, which includes oil and platinum as well as gold.

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