FOCUS:Gold Bulls See Further Sharp Gains On USD Weakness
By James Attwood
Of DOW JONES NEWSWIRES
Friday February 3, 5:25 PM
SYDNEY (Dow Jones)--A glimpse into gold's recent rush to quarter-century highs shows the rally is all about the dollar's bleak outlook, analysts say.
This could mean the yellow metal may easily exceed consensus forecasts that it may peak this year at just above $607 an ounce.
The price of bullion has surged 25% in the last three months, including a dizzying 17% jump since Dec. 21, to around $575/oz, its highest since 1980.
At 0920 GMT Friday, spot gold was trading around $572.15/oz.
Most analysts and traders attribute the metal's recent gains to Middle Eastern geopolitics, inflation fears surrounding high energy prices and talk central banks are stepping up gold purchasing to diversify foreign reserves.
But long-term gold bulls say the geopolitical and inflationary tensions feeding into gold's status as a safe haven and diversifying asset class are tied back to concerns over the U.S. economy and the sustainability of the dollar.
Much of the tension surrounding Hamas' recent parliamentary victory and Iran's nuclear ambitions boil down to the potential dollar pressure of U.S. war spending, said Alastair McIntyre, director of precious metals at ScotiaMocatta in Hong Kong.
"Gold is intuitive of future dollar weakness," he said.
McIntyre and others say U.S move to build external deficits - supported by Asian countries buying up U.S treasuries and bonds to keep their currencies cheap and exports competitive - is unsustainable in the long run and eventually the dollar will weaken under the weight.
At the same time, hidden inflation in the U.S. monetary system mean the dollar is already loosing value, said Peter Schiff, chief executive of U.S-based Euro Pacific Capital.
"You've got a guy like Ben Bernanke coming in (as chairman of the U.S Federal Reserve Board), talking about dropping money out of helicopters and how easy it is to print large quantities of money," he said. "But you can't just print gold."
Breaching $600/Oz Resistance Key To Further Gains
Given gold offers no yield, its growing popularity reflects a rising perception interest rates aren't high enough to compensate for inflation, said Schiff, whose firm has $400 million invested on behalf of individuals in resource stocks and trusts outside the U.S.
Dollar bears like Schiff expect gold to easily exceed the consensus among commodity analysts that the metal will peak this year at just above $607.
"I think it's going a lot higher (and) has a chance of going to $800 or $850 this year to challenge the 1980 high," he said.
Australian research house Fat Prophets also believes global financial imbalances can send gold beyond $850, but offers a more cautious timeframe of the next few years.
ScotiaMocatta's McIntyre noted the difficulties of price forecasting given the lack of recent precedent; however, he said the market could easily target $650 or $675 this year if it can quickly clear the psychological $600 mark.
"At some point, probably when U.S. rate increases stop, those Asian economies that have been competing to keep their currencies low may question whether it's worth their while and may wean themselves off the dollar," he said.
If a flight from US dollar does take place, some participants see gold as better positioned than other paper currencies to benefit, given its historical role as monetary system anchor.
Central banks are likely to become net buyers of gold as a consequence, said Euro Pacific Capital's Schiff.
"But even if governments don't return to gold, individual savers are going to look to gold again as a way to store wealth," he said.
"Gold isn't going up because people want more jewelry, it's going up because they don't want dollars, or yen or euro; governments are printing them like mad and giving no interest so they'd rather own gold," Schiff said.
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