Gold may reach $5,000 by 2020

(Issac John)
Filed on July 20, 2011
Gold may reach $5,000 by 2020

DUBAI - Even after hitting a record high of above $1,600 per ounce on Monday, prospects are that gold price is poised to continue its breathtaking rally to scale loftier heights ranging from $2,000 to $5,000 over the coming few years.

The yellow metal, which has time and again rewarded its investors looking for safe havens in times of volatility and uncertainty in the global market, is now set for an 11th straight year of gains driven by central-bank buying, weaker currencies and increased demand from emerging-market investors on the backdrop of looming debt crises in the world’s biggest economy and the eurozone.

The rally of gold has surpassed even the most ambitious targets predicted by analysts even as recently as last month. For instance, Merrill Lynch raised its 2011 gold price forecast to $1,498 an ounce from $1,423 and increased its 2012 forecast to $1550 from $1,500.

A new report from Capital Economics predicts that gold may reach the seemingly unattainable milestone of $5,000 an ounce if stocks drop in dramatic fashion.

“A variety of methods suggests a target price anywhere between $1,870 and $5,000,” said Julian Jessop, an economist at the London-based research firm.

The precious metal may rally to $5,000 by 2,020 as incomes rise in China and India, the two biggest users, according to Yan Chen, head of metals and mining at Standard Chartered Equity Research.

Gold demand in China, the world’s largest producer, is expected to continue rising as economic growth boosts wealth and inflation rising at the fastest pace in three years drives demand for alternative assets. China’s consumer prices jumped 6.4 percent in June, exceeding the government’s full-year target of 4 percent

In India, record investment demand for gold will keep climbing as higher incomes spur buying, Reliance Capital Asset Management Ltd said. Gold demand in India reached a record 963.1 tons in 2010, according to the World Gold Council. Gold production will grow 3.6 percent annually in the next few years.

“Our own forecast is that prices will climb to US$2,000 by 2012. However, we would not be surprised to see prices reach this level sooner and then rise significantly further,” adds Jessop.

Most bullish analysts have their rationale behind this ambitious target setting. They argue that in inflation-adjusted dollars, gold is still off its high of $850 reached in January 1980 — the equivalent of $2,400 today. The world was arguably even more chaotic then, with double-digit inflation, the U.S.-Iran hostage crisis and the Soviet invasion of Afghanistan. Prices didn’t hold, but they did average about $1,900 that month in today’s value. Another sensible reasoning is based on the ratio of the price of an ounce of gold to a barrel of Brent crude oil.

The price ratio of a barrel of oil to one ounce of gold is just 13.5 today. In 1970 it was 16. If you apply a 16 multiple to today’s $117 price for oil, you get a gold target of $1,870. At times, the ratio has ranged between 25 and 30, implying a valuation of $3,000 or more.

However skeptics are of the view that since gold is above its historical average when compared with equity values, the current price may not hold. Since 1900, the Dow Jones Industrial Average has been about 10 times the price of an ounce of gold. At the moment the Dow is about eight times the value. However, the ratio has fallen as low as 1 to 2 during the Great Depression and the early 1980s.

Jessop argues that one reason to believe gold could move higher is that it remains well below the previous record high for gold in real terms of around $2,400 on 18th January 1980.

“Admittedly, the circumstances today are not quite the same.” Gold prices 30 years ago benefited from double-digit inflation, high geopolitical risks and a slump in South Africa’s output.

Jessop’s bullish stance doesn’t give much weight to a return of the Gold Standard, which many other believe would increase demand for gold from central banks. “It is simply inconceivable that policy-makers in any major economy would want to tie their hands in this way,” he said.

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