Experts are agreed: gold price will go a lot higher

Experts are agreed: gold price will go a lot higher

The dramatic climb in the gold price so far is just the start, with plenty more money to be made as the precious metal climbs further, experts have said.

Despite soaring by around 17% in the last three months alone, to a peak of $1,061 per troy ounce last week, the price is widely expected to continue higher as western currencies experience further signs of weakness, and as disparities between supply and demand continue.

David Dennaro, the head of commodities at Threadneedle Asset Management, said the move higher was not finished yet, because of ongoing fears about currencies.

He said: 'If you're holding pounds or dollars, there is more upside to come. Gold is a store of value, and concerns about the stability of both the dollar and the pound remain reason to buy at these levels.'

These fears have come to the fore, particularly in the case of the dollar which last week was hit by speculation - subsequently denied - that gulf states and other major economies around the world are considering switching the currency they use to trade for oil.

The dollar's move lower was followed by a warning from the US Congress that the country's budget deficit could hit a new record of $1.4 trillion this year. This would be equal to 9.9% of US Gross Domestic Product, having more than trebled year on year following the country's actions to stave off a depression.

November spike

Jeremy Batstone-Carr, the head of research at Charles Stanley Stockbrokers, agreed the price would rise in the short term.

'In the near term it will keep trading on dollar movements as the two are inversely correlated at present,' he said. 'Concerns about the US economy are real and it will hit new highs from here.'

Batstone-Carr reckons gold could hit $1,200 an ounce in the near term - with November earmarked as a potential point for gold to spike in dollar terms, driven by a flood of money moving out of hedge funds.

Batstone-Carr said if money did come out of hedge funds, and was therefore likely be taken out of equities to cover these withdrawals, it could bring equity valuations down, prompting a flight to safe havens such as gold.

Gold at $1,500

An increase to $1,200 sounds like a lot, but by some people’s estimations this is a conservative prediction.

Dennaro said the chronic lack of investment in gold production over many years had not improved despite the rising price in the last decade, while demand was also increasing.

He said with consumers now purchasing the gold via exchange traded commodities and the like, and central banks also becoming net buyers rather than sellers, the price could reach $1,500 in the next few years, while the continued weakness of the currencies would also support gold.

Evy Hambro, the co-manager of the £1.7 billion Blackrock Gold & General fund, agreed there remained a major supply/demand argument which not only supported gold at these levels, but which would drive prices higher from here.

Noting that the gold price has increased around four times over the last ten years, he said supply had continued to fall regardless of this, as it remained more expensive to find and mine new sites.

'Longer term trends are driving gold, and we should see it continue to move higher from here as all the factors are supporting it,’ he said.

Hambro looks at gold in replacement cost terms - covering not only the cost of finding new gold reserves but also extracting the metal, as well as other costs.

He said the current price of gold - even after a decade of gains - remained below the true replacement cost, hence the continued falls in supply. As he said: 'Otherwise production would not be down and companies would be building new mines.'

Without naming a price, Hambro said gold had to rise 'a fair bit' from here, and also stay at that level, until it became viable for new mines to be built and thus boost supply.

Impact of dollar strength

Of course a reversal in the extremely bearish sentiment towards the dollar would have an impact on the gold price in the short term, as Batstone-Carr points out.

He said: 'There is overwhelming bearish sentiment towards the dollar at present, so that can be reversed by positive comments quite easily.' This was in evidence last week, after Fed chairman Ben Bernanke said US monetary policy could be tightened as the recovery takes hold, in a statement which lifted the dollar.

A period of dollar strength would obviously weigh on gold, although commentators remain sceptical about this taking place, with some even questioning the dollar's role as the reserve currency.

Tripling gold price

One man is expecting to see even more dramatic climbs in the value of gold. Christopher Wood, the award-winning strategist at brokerage and investment group CLSA, said the dollar's days as the paper standard were numbered.

He said if discussions about replacing the dollar as the currency used to carry out oil deals were not taking place, then they soon would be. Rumours about China increasing purchases of gold would also come true, Wood reckons.

Wood said the end game was 'the end of the US dollar paper standard', with a myriad of problems facing the country, and he said long term investors should stick with gold and add to their positions when the price dipped.

He added he was retaining 'the long term target of $3,360 per ounce.'

citywire.co.uk