Gold
bulls claim price could double to $3,000 in five years By Ian Cowie - Published:
7:35AM BST 20 May 2010
Fears
that American, British and other governments intend to inflate
their way off the rocks of excessive debt prompted record
inflows into gold this week. Link
to this Video
Now some fund managers claim the price could
more than double to $3,000 (£2,080) per ounce within
five years.
Heavily indebted governments throughout the
developed world are struggling to fill deficits of black-hole
dimensions in public finances by imposing spending cuts and
tax rises. Both are expected in Britain's emergency Budget
on June 22 and neither will be popular.
But keeping interest rates lower than inflation
and letting the currency take the strain is another way to
reduce the real value of debt. You can see why politicians
may feel that is the ''least worst'' option.
Stealthily robbing savers by eroding the purchasing
power of money is less likely to cause riots in the streets
than spending cuts, because inflation tends to hit older people
hardest while unemployment hits the young.
Governments can devalue their own currencies,
but it is harder for them to make more gold. That fact helped
prompt record inflows of $484m (£336m) into gold exchange-traded
commodities this week, while gold trading volumes peaked at
$2.1bn (£1.45bn).
However, the precious metal is not a one-way
bet and it slipped back below $1,200 (£830) on Thursday
as some investors took profits amid anxiety about an unsustainable
bubble in the gold price.
Graham French, manager of the M & G Global
Basics Fund, was undeterred. He said: "In a scenario
of rising sovereign risk, where government finances are hugely
overstretched and central banks have been systematically devaluing
paper money, gold's value as a safe haven and a stable physical
currency can only increase over the medium term.
"Against this backdrop, the gold price
could go much higher than these already elevated levels. It
wouldn't be too far fetched to see it rising above $2,000,
or even up to $3,000."
Mr French's strategy is based on the belief
that things that emerging markets sell will fall in price
over the next five years, while things that emerging markets
buy will rise in price.
The explanation is that demand from the heavily
indebted developed world may remain subdued, while demand
from largely debt-free consumers in emerging markets will
rise.
Rupert Robinson, chief executive of Schroders
Private Bank, said: "Gold is setting record highs in
almost every currency, despite headwinds including a strong
dollar and monetary tightening in India and China, the main
end markets for gold. Today's economic environment makes gold
a must in any client portfolio.
"Interest rates are at historically low
levels; central banks are bailing out the system; we have
seen a huge amount of quantitative easing; currencies being
debased and governments around the world are short of money.
Nothing goes up in a straight line, indeed
there are signs that gold may be becoming over-owned and too
fashionable in the short term, but I think that over the long
term gold is a good asset to hang on to. It could easily reach
$2,000 per ounce within the next five years," Mr Robinson
said.
Richard Davis, of BlackRock's Natural Resources
team, added: "Gold always does well in times of uncertainty,
and this week is no exception. Lingering concerns over the
Greek bail-out, uncertainty over global economic growth, and
an inconclusive election result in Britain have all created
nervousness in stock markets, and risk-averse investors are
looking to gold as a store of value.
The fact that gold bullion is a real asset,
which does not depend for its value on any company or government,
makes it compelling as a 'safe haven' investment. Gold bullion
is particularly popular in Asia and the Middle East and investors
in these regions have continued to pile money into the asset
class.
"It is worth noting that, adjusted for
inflation, gold is still some way off its all-time high of
$850 per ounce in 1980, equivalent to more than $2,200 in
today's terms."
Adrian Ash, of BullionVault.com, said: "Inflation
alone is not the driver. It's real interest rates that matter,
because if cash is beating inflation, no one needs gold. Whereas
when cash loses value, year after year – and if the
major productive alternatives, such as bonds, shares and property,
also fail investors as well – then gold really comes
into its own.
"Cash is being actively devalued –
and not just in Britain; the Eurozone crisis is only the latest
prime mover. Underlying the decade-long upturn in gold is
a repeated attack on the virtue of savings," Mr Ash said.
Gold's fundamental appeal remains that it
is a store of value that is largely immune to government intervention.
Mr French observed: "The great Irish
dramatist George Bernard Shaw said: 'You have to choose between
trusting the natural stability of gold or the natural stability
and intelligence of members of the government. And with due
respect to these gentlemen, I advise you, as long as the capitalist
system lasts, to vote for gold.' I have to say, I'm with Bernard
Shaw on this."