Money and Metals

The Money Week site makes the case for $1,000 gold. "The gold price has doubled in the last three years. It has now settled at around $550 an ounce, after some profit taking. The World Gold Council expects that it will go to $600 an ounce by the end of the year. I am never sure about such short term market predictions; it is always hard to get one’s timing right."

"Another doubling of the price in the next three to five years is entirely plausible on the known facts. The first factor is the expansion of the US debt, both in terms of the Budget deficit, which is not under control, and the trade deficit. The rise in US debt has been accompanied by an expansion in the money supply."

"Excessive debt and an inflated money supply make the dollar a weak currency, at a time when other currencies, particularly the euro are also unattractive. There is every prospect that the weak currencies will remain weak for the next five years. Democratic parties have to win elections, and elections are not won by policies of monetary discipline."

"The second favourable factor is the strength of the demand for gold as jewellery, particularly in Asia. In 2005, the jewellery market absorbed 2,736 tonnes of gold, with a value of about $40 billion. That was an increase of about 4 per cent in tonnage. In terms of value the rise is considerably greater."

"Alan Greenspan blames terrorism for having pushed gold 'beyond its underlying strength as a commodity.' There is no doubt that terrorism, or the threat of war, is a political cause for purchases of gold. I can see no reason to expect terrorism to decline over the next five years. Certainly the situation in Iraq remains intensely threatening. Unfortunately, fear of terrorism and war is likely to remain a constant, if it does not actually get worse."

"The final factor is the oil market. The impact of the local troubles in Nigeria has shown that the oil market is very precariously balanced. Any major political or security problem in the Middle East could push the oil price above $100 a barrel. At present a barrel of oil costs the same as an ounce of gold. I do not expect that to be reliable as a constant, but it is worth noting. If Iraq or Iran gets much worse, gold will rise."

"There are, therefore, several long-term, underlying reasons to expect a higher gold price. I can see no immediate downside risks, though there will always be profit taking. Even the hedge funds are likely to accelerate the present upside movement, since they badly need the opportunity of a major speculative trend."