Gold Is Back But How Long Can It Last?

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London-based VM Group forecasts the possibility of gold trading within a wide range over the next 18 months from $700 to $1,300 as it falls back from its recent peak...Prices are only likely to go to the top end of this range if the credit crisis returns with a vengeance, but further gains from current prices are possible even without this as the US slowdown continues, gold supply from all sources remains constrained, and investor nervousness about other assets remains.

London-based VM Group forecasts the possibility of gold trading within a wide range over the next 18 months from $700 to $1,300 as it falls back from its recent peaks.

For a long while in the gold market the great hope was that bullion could beat its all-time high price of $850/oz, set in January 1980. On 3rd January 2008, nearly 28 years later, it soared through that level, and then through $900/oz on 24th January, and $1,000/oz on 14th March. This was a remarkable comeback from where it languished in 2001, at under $300/oz. In an important sense it was vital that it made this rally. If it hadn't, it could have kissed goodbye to its status as a last-ditch defensive quasi-currency. The price has subsequently fallen, as a semblance of calm has returned to financial markets. Where we go from now will depend largely on the state of affairs in the macro-economic world, and to a lesser extent on its own supply-demand fundamentals...

. . .given our observations about the internal dynamics of the international gold market, we forecast a wide trading range of $700/oz to $1,300/oz over the next 18 months. The low end of our range might appear very conservative given that the price is currently $150/oz higher; but it was only three years ago that the price was nudging $400/oz. Prices are only likely to go to the top end of this range if the credit crisis returns with a vengeance, but further gains from current prices are possible even without this as the US slowdown continues, gold supply from all sources remains constrained, and investor nervousness about other assets remains. Towards the end of this 18-month forecast period, with a new President in the White House, a recovering US economy, and hence a stronger dollar, gold prices could be turning down again, although we don't believe they will revisit lows seen earlier this decade for many years to come.

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