Brighter and brighter

In­ter­na­tional com­men­ta­tors pre­dict huge leap

Finweek English Edition - - MONEY CLINIC -

THERE HAVE BEEN a host of fore­casts re­cently that the gold price in US dol­lars will at least dou­ble be­fore the cur­rent strong bull mar­ket in the metal comes to an end. Fore­casts of a pos­si­ble price of up to US$10 000/oz are be­ing made by lead­ing an­a­lysts.

The crux of their fore­casts is that the se­ries of fi­nan­cial crises cur­rently fol­low­ing so closely on one an­other have def­i­nitely not ended. In­vestors world­wide are concerned about this and look­ing to se­cure their cap­i­tal – and, tra­di­tion­ally, gold is seen as the safest haven. There is in­creas­ing dis­trust of paper (fiat) money, es­pe­cially the US dol­lar.

This dis­trust also ap­plies to gov­ern­ments. Many cen­tral banks that were sell­ers of gold for so many years are now net buy­ers. Then there’s the emer­gence of China and In­dia – and even Rus­sia – as buy­ers of gold.

David Rosen­berg, Mer­rill Lynch’s for­mer North Amer­i­can econ­o­mist and cur­rent chief econ­o­mist at Gluskin Sh­eff in Canada, has now come to the con­clu­sion that his ear­lier fore­cast of $3 000/oz can be re­garded as con­ser­va­tive. He bases that on, among other things, the ra­tio of gold to in­ter­na­tional gross do­mes­tic prod­uct, as well as the money sup­ply (M3). If the ra­tios were to re­turn to their ear­lier peak, gold should be trad­ing at $5 300 and $5 700/oz re­spec­tively.

An­other com­men­ta­tor who per­haps best sums up the thoughts of the gold op­ti­mists is Peter Krauth, CEO of Global Re­source Alert and a well-known ex­pert in met­als and min­ing shares. He be­lieves gold could reach around $5 000/oz be­tween 2012 and 2014 on the ba­sis of the fol­low­ing five rea­sons: Since 2001, the gold price has risen by around 400% in the midst of rela- tively low in­fla­tion of about 2,5%. The cur­rent view is that the US Fed­eral Re­serve will keep short rates close to zero, open­ing the door to ram­pant in­fla­tion. The cen­tral banks’ stim­u­la­tion pack­ages to­tal an enor­mous $12 tril­lion, a large por­tion of which still has to be spent. The de­mand for gold has broad­ened. Large in­sti­tu­tions, from hedge to pen­sion funds, are al­lo­cat­ing sub­stan­tial sums to gold. And the World Gold Coun­cil points out there’s a rapid in­crease in the num­ber of peo­ple who can be re­garded as mid­dle class (es­pe­cially in the East) and have money to spend on gold. That’s be­com­ing an im­por­tant bull fac­tor for the metal. Cen­tral banks be­came net buy­ers in 2009 – the first time in 20 years. The economies of the US and many other coun­tries are strug­gling and there’s a con­fi­dence cri­sis re­gard­ing fiat money. In such cir­cum­stances, the de­mand for gold will keep in­creas­ing as peo­ple try to pro­tect the buy­ing power of their in­vest­ments. There’s a ma­nia stage ly­ing ahead for the gold mar­ket. That will put the gold bub­ble through three dis­tinct stages: de­val­u­a­tions, grow­ing in­vest­ment in gold and, last of all, what Krauth calls the “strato­spheric” stage, when the price will prob­a­bly reach $5 000/oz. An­other com­men­ta­tor, Arnold Bock, writes in a sim­i­lar vein on www.safe­haven. com. He even be­lieves $10 000/oz can be reached, be­cause of (among other things) ap­proach­ing sov­er­eign debt de­faults, the col­lapse of large fi­nan­cial in­sti­tu­tions, ma­nip­u­la­tion of the gold mar­ket and in­suf­fi­cient sup­ply to meet the grow­ing de­mand.

US Gold Cor­po­ra­tion CEO Rob McEwen has made a study of what he calls the hor­rific scale at which the US and other gov­ern­ments are go­ing into debt. It’s a fore­gone con­clu­sion for him that the value of the US dol­lar will keep fall­ing and he thinks gold could al­ready reach $2 000/oz by year-end 2010.

Alf Field, well known in SA, writes the US is head­ing for such a huge fi­nan­cial cri­sis it will over­whelm all the other fac­tors. The green­back will be the main sac­ri­fice. That could re­sult in a gold price of $5 000 to $10 000/oz.

Harry Schultz, vet­eran pub­lisher of a widely read in­ter­na­tional news­let­ter, says the world econ­omy is at a heart­stop­ping moment. At the one ex­treme there’s talk of mas­sive de­fla­tion and even de­pres­sion and, at the other, hy­per­in­fla­tion. Schultz feels gold has the po­ten­tial to reach $6 000/oz and con­se­quently ad­vises his in­ter­na­tional clients to in­vest 40% to 50% in gold shares and gold it­self, 10% to 15% in other com­modi­ties and 30% to 40% in govern­ment bonds.

It’s in­ter­est­ing that some other com­men­ta­tors also ad­vise in­vest­ing in gold shares with mar­ginal mines (such as Har­mony in SA), yield­ing the largest po­ten­tial profit.

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