Predicted gold prices continue to rise

Gold has had an incredible year. The price on the last trading day of 2009 stood at $1,085 an ounce; it has since risen to about $1,380, a rise of 27pc.

It has been higher still: the gold price struck its highest ever level of $1,421 on November 9.



There doesn't seem to be much doubt about the cause of this bull market. All the analysts we spoke to agreed that "quantitative easing" – or printing money – by central banks had sparked fears over the value of paper currencies, spurring investors to switch to more tangible assets.

By acting as a trusted store of value in times of uncertainty, gold was reverting to its ancient role. In particular, investors were using it as a hedge against inflation.

"Gold's rise this year has been driven by the big events in the global economy," said Daniel Brebner of Deutsche Bank, who has had a successful year when it comes to predicting the gold price. "The first and second bouts of quantitative easing by America's Federal Reserve changed investors' perception of the value of the dollar and their expectations about inflation."

He pointed out that, while the Fed's actions had attracted the most attention, other central banks had worked to loosen monetary policy, encouraging inflation. "The European Central Bank has provided a trillion dollars of funding, while China has been boosting its money supply," said Mr Brebner.

"All these actions have the same effect: they reduce faith in the value of money."

Anne-Laure Tremblay of BNP Paribas agreed. "Quantitative easing is adding liquidity in an environment of already loose global monetary policy," she wrote in a recent report. "The Chinese central bank (PBOC) in particular has played a central role in this regard. While the size of quantitative easing in the US is estimated at roughly 6pc of US GDP, the size of the PBOC's measure is closer to 6pc of world GDP."

The gold price tends to rise in times of loose monetary conditions, she added.

The price of gold had been rising since long before the credit crisis, however – in fact, it has already experienced a 10-year bull run since hitting a low of about $250 in 1999. As a result, some have warned of a bubble.

George Soros, the investor who bet $10bn against the Bank of England in 1992 and won, said in January: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold." But he added that buying at the start of a bubble was "rational" and funds he controls reported large holdings of the metal earlier this year.

So what does the future hold for gold? Is Mr Soros right – should investors expect the price to collapse as the bubble bursts? Or will the West's continuing loose monetary policies mean that demand will remain high, pushing the price up further still?

Over the next couple of years at least, analysts expect the price to keep rising.

"The worry is that the West's borrowing continues while interest rates remain very low," said Mr Brebner. "The question is, when will conditions revert to normal? There are economists with Nobel Prizes who don't know the answer – we have never been in this situation before. And if investors don't understand what's going on, they revert to what they know, such as gold.

"The gold market is responding to risk. Is this rational? I think it is."

Mr Brebner predicted a gold price of $1,450 next year and $1,600 in 2012, with the chance that it could go higher still. But he warned that if the price went closer to $1,800 or $2,000 there was also "a strong possibility of moving into bubble-type territory".

He added: "We are seeing things – quantitative easing – that we have never seen before. So the bubble level is hard to fix. But if it reaches those $1,800 or $2,000 levels, I would recommend taking stock and looking at the fundamentals – are the central banks going to print even more money? Is there still a sovereign debt crisis in the West?

"We don't believe there is currently a bubble in the gold price. But as the consensus in favour of gold builds, one could develop."

Ms Tremblay said: "If the dollar's position has come under question, there does not appear to be a readily available substitute in terms of another 'fiat' currency. The eurozone's peripheral issues have dented the euro's status as the alternative reserve currency. This context of increasing uncertainty has benefited gold."

She added that interest in gold was "broad-based", with investment demand rebounding because of fears over the eurozone, continued buying by central banks and seasonally strong demand from the jewellery sector. "At the same time, economic growth, particularly in emerging markets, is supportive of industrial demand for gold," she said.

"Consequently, we have raised our 2011 gold price forecast to $1,500. If we see the gold rally extending in 2012, it will take place at a more moderate pace. We expect gold to average around $1,600 in 2012."

Analysts at Investec were less bullish, however. They agreed that gold was likely to trade at $1,500 by the third quarter of 2011 but predicted that it would remain between $1,400 and $1,500 over the following year, before starting to fall in the later part of 2012 to a "long-term" price forecast of $950.

"We forecast a decline (or possibly even a reversal) in investment demand once developed markets illustrate a real return to economic growth," they said. "Even with a bullish outlook for jewellery demand, we do not believe this will be sufficient to fill the supply gap. We expect this outcome during a period when global production is expanding. Hence we forecast the gold price to fall from late 2012.

"We expect institutional investment to be the primary mover out of gold once the removal of a possible gold boom detracts from maintaining gold allocations and as other assets again offer better returns under reduced levels of risk.

"In late 2012, we think selling of more liquid forms of gold such as exchange-traded funds (ETFs) will begin."

Marcus Grubb of the World Gold Council said: "Since the beginning of 2010, the rising gold price has been driven by macroeconomic factors as well as continued support for gold from its diverse consumer base.

“From an investment perspective, institutional and retail investors have continued to recognise the benefit of gold as a long-term preserver of wealth against continued economic weakness in the US and the possibility of yet more quantitative easing, as well as sovereign risk and fears about the stability of the euro.

“In addition, there has also been strong support from the jewellery sector despite the high gold price, with demand being particularly robust in traditional markets, such as India and China. Demand from the industrial sector also staged a recovery in 2010."

source