Gold Could Soar Much Higher

Source:

"…the 20% increase since August might only be the beginning."

Gold is very different from other commodities. Still, its price depends on the same three factors as oil or wheat: supply, demand and financial conditions. Put them together and the 20% increase since August might only be the beginning.

Start with supply. Production from mines totaled 2,414 tons in 2008, worth $88 billion at the 11/16 price. There will be more this year, but less from 2010 onwards. It will take years for new mines to come on stream. Recycling from scrap jewelry and official gold sales were worth $40 billion in 2008, but those sources aren't likely to cough up much more.

India recently purchased 200 tons of gold from the IMF. If China decided to put 10% of its $2.3 trillion of official reserves into gold, it would need to buy up almost three years' worth of production, at the current price.

Such a big move isn't likely, but smaller shifts from central banks—selling less—could be enough to move the price, as long as other demand keeps up. The long period of ultra-easy money may not be undermining the monetary system, but many people fear it might. Some of them will buy some more gold, just in case. With yields on government bonds so low, gold looks like cheap insurance.

Financial conditions favor all commodities, gold included. Interest rates are low and banks are more willing to support investors and speculators than to lend to businesses and consumers..

When money is easy and demand moves much faster than supply, prices can explode. In 18 months from July 1978, gold went from $185 per ounce to $850. That's $2,400 in today's dollars. And interest rates then were much higher than now. A similar price rise from here would bring gold to more than $5,000 per ounce.

Related Articles

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe