Gold prices are set to jump towards $1,000 an ounce and probably beyond to new records as droves of investors fearing financial instability and surging inflation pile into the precious metal.
Expectations of a weaker dollar, which makes gold priced in the US currency cheaper for holders of other currencies, will also help boost prices of the precious metal seen as a store of value during uncertain times. Strong investor interest in the precious metal can be seen in the record holdings above 867 tons of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust.
“The core problem for investors is financial instability, if you look at the IMF numbers, we are only halfway through the non-performing loan cycle,” said Ashok Shah, chief investment officer at fund manager London & Capital. The IMF last month declared losses on US loans and securitized assets were likely to reach $2.2 trillion, up from an October estimate of $1.4 trillion.
These losses replicated in other major developed economies have frozen bank lending to corporates and consumers and led to recession in the global economy. In an attempt to kick-start bank lending and activity central banks have slashed interest rates. Governments have pumped large amounts of money into the global economy and more is planned.
“Governments are supplying liquidity into the system and unless they sterilize it (issue bonds) they are laying the foundations for much higher inflation for years to come ... These are the things gold thrives on,” Shah said. “More corporate, financial and economic bad news will do the trick. Once it gets a foothold and picks up momentum gold can easily break through to new highs.”
Spot gold hit a record high of $1,030.80 an ounce in March 2008 and is now at around $910, a gain of more than 10% since the middle of January.
Potential inflationary pressures can be seen in the growth of money supply. January M1 rose about 20% year-on-year in the United States where a stimulus plan of about $800 billion is in the works.
“M0 is growing at about 9% worldwide,” said Angus Murray, founder of fund manager Castlestone Management. “People need a real asset to offset inflation. Investors are putting gold into their portfolios as an insurance policy. In 24 or 36 months time, gold will be higher by a minimum of the growth rate in money supply.”
Also on the horizon is a weaker dollar, which in recent weeks has risen against the euro and pound, partly because US investors have been taking their money home, fund managers say. “When that repatriation reverses the dollar will weaken. Let’s call it 14 or 16% -- in dollar terms gold will rise by that much again,” Murray said.
Bank analysts too, for similar reasons have changed their gold price forecasts. But they expect prices to peak this year. Swiss-based UBS expects gold prices to average $1,000 an ounce this year from a previous forecast of $700 and $900 in 2010 from $700 an ounce.
“Gold has rallied in most major currencies despite a firm US dollar, a sign of strong buying interest in the metal,” UBS said in a note this week. Gold priced in euros hit a record of above 726.89 an ounce early this week and in sterling it touched a record above 660 last month.
US bank Goldman Sachs followed with a forecast of $1,000 an ounce in the next three months from $700 previously. “If financial risks ... remain high, gold prices could remain higher for longer, presenting upside risk to our forecasts,” Goldman said. “The recent strong demand for gold has not been irrational but rather pretty much in line with the probabilities of financial and sovereign default.” (Reuters)