Specifically, inflation, possible hyper-inflation, dollar weakness, and supply/demand and investor demand fundamentals are all positive for the price of gold toward the end of the summer, says Donald W. Doyle, Chairman and CEO of Blanchard and Company.
"Gold is performing strongly at the same time the stock market is making a mild rally and as the dollar continues to stay at a level that we consider to be inordinately high," Doyle says.
Doyle says demand is central to gold's current sustained high price levels, with Chinese and Russian central banks adding to their holdings and investor demand continuing at record levels.
"The fundamentals for gold, and particularly investment demand, are very strong," Doyle says. "Sales of gold by the U.S. Mint, which have always been a good proxy for U.S. investment demand, are approaching those of all of 2008. . .and it's only the beginning of August."
Doyle also says the case for gold now is being made by people who, in the past, recommended only stocks. Merrill Lynch's "Metals Strategist" predicts that the unintended consequence of the bailouts will be a return of inflationary pressures to the commodity markets. If the Fed fails to keep foreign capital interested in financing its twin deficits, the U.S. dollar could spiral downward, providing strong support to commodity prices. The weaker dollar will then help gold reach record new prices of $1200-$1500.
Morgan Stanley's analysts are divided on which threat is worse for the global economy, deflation or inflation, but said:
"With policymakers around the world throwing massive conventional and unconventional monetary and fiscal stimuli at their economies, we think that it is worth exploring the black swan event of very high inflation or even hyperinflation. While such an outcome is clearly not our main case, the risk of hyperinflation cannot be dismissed very easily any longer, in our view." -Morgan Stanley research note, via Financial Times