Brushing the bull dust off gold

Posted: ’19-SEP-05 13:00′ GMT

As gold bullion made fresh 17-year highs, above $463 an ounce in spot markets on Monday, reinvigorated gold bugs were re-emerging, driven by animal instincts to make armchair calls of more than $1,000 an ounce or more. Gold bottomed out at $254.20 an ounce in 1999.

As a sampler, at ABN Amro, analyst Nick Moore said that the 20-year historical ratio between prices for crude oil and gold suggests that the latter should be priced around $1,100 an ounce. Such, and many other apparent would-be, gold bugs appear to overlook that the current, and future, global financial system is unlike any known.

Gold is also bugged by history. As Citigroup Global Markets puts it in a recent note, ‘murky macro catalysts and magical mystery multiples are enduring features’ of the global gold picture. Today’s global financial system is characterized by major global imbalances, not least the ‘twin’ US deficits, now at all-time records in nominal and real terms.

Opposite the US record current account deficit, most of the world’s net trade-driven savings are now held by Asian countries, along with Germany, Switzerland and countries in the Middle East. Much of that cash is being held in global bonds, where yields have been falling, in line with global inflation, for close on ten years.

On the flip side, gold’s hybrid role – including investable asset, alternative currency, and industrial metal ‘ has certainly paid off since 1999. Gold has indeed benefited from rising crude oil prices, recent inflation data, global economic imbalances, the weak dollar, strong Indian fabrication demand, Chinese retail investment, and, to some extent, recycled Middle Eastern petrodollars. Looking to diversify your retirement?  Read this article on how to rollover to Gold, Silver, Platinum or Palladium.

Falling mine production has helped gold’s cheerleaders, along with disciplined selling of gold bullion by central banks. But all told, for professionals in the metals forecasting field, the outlook for gold bullion prices is muted, to say the best. At a breakfast presentation on Friday in Johannesburg, Jeffrey Christian, managing director of New York based CPM Group, saw $430 to $470 an ounce for the coming six months.

According to Gold Fields Minerals Services (GFMS), gold is set for a core price range of $420 to $480 an ounce in the second half of this year. As in any other commodity market, price spikes cannot be ruled out. According to Christian, it’s ‘very hard to predict the top of the market.’

Christian recalled one of his favoured anecdotes on Mineweb Radio; it was about September 1979, ‘when the gold price was gearing up to touch $300 for the first time.’ The gold mining analyst at Merrill Lynch asked Christian where the price would be in April, ‘and I said it would be around $500.’

When gold hit $850 in January 1980, the analyst called Christian and said ‘boy, aren’t you conservative?’ Christian reminds that in December 1979, $500 an ounce ‘was a radical idea.’ In April 1980 the price was back down to $500, so Christian called the Merrill Lynch analyst and said ‘$500 in April ‘ I didn’t tell you which direction it was going to come from.’

On Friday, Christian said that going forward, the ‘fundamental market clearing price’ for gold was somewhere between $340 and $400 an ounce. On Friday as well, in a column on, D. W. Crotty quoted ‘pessimist:’ ‘After 17 years, what do you have? A zero percentage move. Fantastic! That’s the best example of dead money I’ve seen.’

Going forward, the potential risks for the gold price are being cheered to the upside. According to Citigroup, ‘gold should be well-positioned if the US economy slows sharply, given debt and dual-deficit strains that would likely emerge, or if the Federal Reserve attempts to reflate its way past near-term growth impediments (oil prices pinching consumer spending, thus threatening the housing bubble).’

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Given that the price of gold bullion has essentially stagnated (in the optimistic sense) for 17 years, a little further upside for the current price should cause little harm. Gold has not been this high since June 1988, when Ronald Reagan was president of the US, and the Netherlands was ready to become the second country to connect to the Internet. How the world has changed, and how it could change again.