Gold
price could hit $1,500 By Ambrose Evans-Pritchard
Last Updated: 12:11PM BST 20 Apr 2009
The
aggressive monetary policy of central banks around the world
is playing havoc with the structure of the bullion market,
creating a chronic shortage of gold that may soon push the
metal to fresh records above $1,500 an ounce.
Charles Gibson, a gold expert
at Edison Investment Research, argues in a new report that
negative real interest rates (below inflation) in the US and
beyond has upset the "leasing" machinery in the
gold industry and led to a sustained market squeeze.
This is what occurred in the late 1970s, driving
gold prices to $850 and ounce – roughly $1,560 in today's
terms. Gold finished last week at $870
Mr Gibson said the powerful dynamic could
lead to a second leg of this gold bull market, even though
the metal has already enjoyed a torrid run over the last eight
years.
In normal times, gold mining companies sell
– or "hedge" – a chunk of their output in advance
through bullion banks. These banks cover their positions by
leasing gold from central banks. This bread-and-butter trade
created excess supply of 500 tonnes each year until the start
of this decade.
Low real interest rates have caused the process
to reverse, creating a shortfall of about 500 tonnes. The
process accelerates as rates turn negative, leading to a scramble
by market players to find physical gold.
There are already reports that gold bars are
becoming scarce, partly due to fears that futures contracts
and other forms of paper gold may not prove reliable if there
is a serious break-down in the global financial system. Pure
metal -- whether Krugerrands, Maple Leaf coins, or the "five
tael biscuit" favoured by the Chinese – entail no counterparty
risk.
Mr Gibson says the Fed's monetary blitz will
end in another burst of inflation akin to the late 1970s.
That is a disputed claim as deflationary forces tighten on
the global economy. Some of the big global banks are already
calling the start of a bear market. Rarely has the gold fraternity
been so schizophrenic.