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Gold: Barbarous Relic Or Investment Superstar? Part 3

In part one of this three-part series about gold as a hedge and investment, I talked about its detractors. In part two, I discussed how U.S. dollar weakness, geopolitical risk, and supply/demand factors contributed to gold’s meteoric rise in price this year. In this last installment, I will look at the different forecasts for the precious metal.

As I type this, the spot price of gold is hovering around the $800 level. The metal reached its highest ever price of $850 per ounce back in January 1980. Gold prices touched $845.58 an ounce two weeks ago on November 7. Back on October 30, MarketWatch reported that Bear Stearns was predicting an average price of $775 per ounce of gold for 2008 and $750 for 2009. Consensus forecasts were for $721 in 2008 and $703 in 2009, the brokerage noted, citing Thomson Financial data. Meanwhile, Credit Suisse forecast that the precious metal would reach $838 an ounce in 2008, $950 in 2009, and $1,050 in 2010. Credit Suisse analysts argued:

A number of drivers collectively support the gold price… Our studies indicate in the long term global gold production will begin to decline as the diminishing number of new reserves fails to compensate for dying mines. The decline in global gold production will likely be accelerated, should the gold mining industry continue to incur significant year-on-year inflation rates which are not offset by similar or significantly higher gold price increases year-on-year.

On Monday, Philip Klapwijk, executive chairman of Gold Fields Mineral Services Ltd, a precious metals research consultancy, told the audience at the London Bullion Market Association’s precious metals conference in Mumbai, India, that gold may reach $1,000 an ounce by next year. He said continued weakness in the U.S. dollar, surging crude oil prices, and continuing geopolitical tensions are pushing the price of the metal higher.

A poll of the audience at the London Bullion Market Association conference on Tuesday showed gold was forecast to rise to $843.70 an ounce by September 2008. The survey was issued electronically to about 150 delegates including traders, bankers, analysts, producers, and fund managers at the two-day global conference on precious metals. Attendees also predicted that central banks would sell 470.40 tons of gold in 2008, down from an estimated 550 tones in 2007.

On Tuesday, Reuters said that the survey also revealed the following:

• 51% of the responses said investor interest was “the most important factor that would sustain the commodities super cycle,” followed by 35% who saw physical demand as having the maximum impact.
• 52% said the U.S. dollar was the “main factor” to influence gold prices, while 19% said moves in oil and other commodities would affect prices.
• Nearly half of those responding said micro hedge funds were having the most important influence on the price direction of precious metals, while 17% saw institutions having the maximum influence.

It’s interesting to note that MSN Money pointed out today that over the past 30 years, the correlation between gold and the U.S. dollar has been greater than 70%, according to CIBC World Markets analyst Barry Cooper.

Dr. Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, told Bloomberg on November 15 that gold may “easily” rise to a record $1,000 an ounce in 2008 as the U.S. dollar weakens and Asian central banks diversify their reserves. Dr. Faber is famous for advising his clients to get out of the U.S. stock market one week before the October 1987 crash, and for urging them in 2001 to buy gold, right at the beginning of a six-year rally.

Dr. Faber noted that:

The price of gold will continue to go up and probably very substantially. In the long run, it’s very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.

Yet, Faber also realizes the likelihood for corrections during gold’s ascent, like what happened after gold prices touched $845.58 an ounce two weeks ago. He said, “I don’t know of any market that goes up in a straight line. A continued correction from here wouldn’t surprise me; it’s a correction, a setback, in an ongoing bull market.”

Harry Schultz, who is in the Guinness Book of World Records as the world’s highest paid financial consultant and also publishes the International Harry Schultz Letter, says gold will advance past the thousand dollar mark in 2008. Over the past three years, Schultz’s investment letter is up 40.39% annualized versus 13.98% annualized for the DJ Wilshire 500. On October 8, MarketWatch reprinted the following from the newsletter:

With an election coming, the Fed went for bandaging a slipping economy which affects votes and sacrificing the dollar, which is harder for the public to measure. Big rate cuts, like this 50 points, are always an act of desperation. Such cuts have usually been followed by recessions. More cuts will follow. It set the future in cement for the U.S. dollar. Cement overshoes. Currency debasement never produces wealth. Fed knows this, but took a political decision. Nothing new about that. Much higher inflation now guaranteed … My tentative targets (by end of 2008): 14% (inflation), $1,600 (gold) and $45 (silver).

Schultz added:

Gold is starting into the most exciting part of its long-term bull market, the so-called second (and monetary) phase. Herein we normally see the biggest percentage gains, matched by biggest corrections as we saw in the ‘70s gold rush: in 1974, gold corrected 25% in 4 months (most gold shares fell 50-70%); in 1975-76 gold fell 50% (most shares fell 70-90%) and took 2 1/2 years to get back to old high before then rocketing to new highs. But that makes for great trading opportunities. This is the phase where the BIG money is made, by those who go with the tides. In and out, in and out…

Finally, there is Richard Russell, who gained wide recognition from a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late fifties through the nineties. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-66 bull market. And almost to the day he called the bottom of the great 1972-74 bear market, and the beginning of the great bull market which started in December 1974. Russell wrote in his November 7 issue of Dow Theory Letters (as reprinted on Gold-Eagle.com) that:

If gold can close above its 1980 peak price of 850 — it will have overcome a resistance level that has held it back for 27 years! Thus, a decisive closing above 850 could bring about at least a doubling of the current dollar price for gold.

Therefore, Russell sees a potential gold price of at least $1,700. Yet, Richard Russell’s commentary from November 7 is notable in that he suggests gold’s future performance will reveal the fraud inherent in the U.S. monetary system:

It really is sad. Here’s gold and silver (“specie”) mandated as the only money by the Constitution of the United States. Yet our citizens have been kept in the dark about gold for generations. Instead, Americans have been touted on the value of fiat money, rudderless money. This fiat money is created by a private banking cartel (the Fed). This transfer of US money-creation has never been authorized by a Constitutional amendment.

Russell hammers his point home:

I’ve said this before, but I’ll repeat it — the whole system of fiat (paper) money is the greatest fraud ever perpetrated on the American people. Our defense against this “counterfeit” money is, and always has been, Constitutional money — gold and silver. Federal Reserve Notes (currently termed “dollars”) are a blatant lie. Today, rising gold is dragging that lie out into the open. Ultimately, the truth will out. Rising gold is shouting the truth – “gold is money, Federal Reserve Notes are a lie and an abomination.”

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)