Gold Record Is Distant Prospect
By MELANIE BURTON
November 12, 2007; Page C10
Gold made headlines last week by flirting with its 1980 peak price, but the precious metal remains far short of its inflation-adjusted record -- and probably won't see it soon.
On Friday, gold traded in the cash market at $831.50 a troy ounce, nearing the $850-an-ounce record that 27 years ago was briefly touched (too briefly to be captured by the monthly chart at right). Adjusted for inflation, the 1980 price translates to $2,250 now. Similarly, gold futures on the Comex division of the New York Mercantile Exchange settled $2.70 lower at $832.50 Friday, a mere $40.50 from the January 1980 all-time high for nearby Comex gold. That inflation-adjusted price is about $2,400.
While a raft of bullish factors have catapulted gold prices just as they did in 1980, analysts said a real-price peak remains a distant prospect.
A collapse in the dollar, an ailing global economy, higher oil prices and inflation fears, as well as "very significant" cuts to interest rates and surging investor interest, would all be needed to push gold toward 1980 levels, said Philip Klapwijk, executive chairman of gold consultancy GFMS.
"If you get all of that coming together, then under those circumstances maybe you'd get $2,250 an ounce taken out," Mr. Klapwijk said. "But I personally think that's unlikely."
Still, some parallels between the current economic climate and that of 1980 can be drawn, analysts say. Inflationary pressures have once more reared their head, as benchmark crude futures fast approach $100 a barrel, similar to when the Iranian revolution caused crude prices to double over the year to April 1980, when U.S. fixed-price crude hit $39.50 a barrel.
The sharp increase in crude prices helped pushed inflation near 15% in the U.S. that year.
However, "it's more a question of concerns than actuality, because if you look at the inflation numbers you see at the moment, they're not terrible," said analyst Peter Dixon of Commerzbank.
Also, in 1980, a U.S. recession was just around the corner with the Carter White House exiting and the Ronald Reagan administration entering.
Mr. Klapwijk said some market watchers see a similar story unfolding, with fears that losses in the global banking system may be greater than anticipated, curtailing world-wide economic growth.
Analyst Tom Kendall of Mitsubishi Corp. thinks they have it wrong. "On the surface, it's an attractive theory, but the biggest change you have to factor in today is the position of the Chinese economy on the world stage. Back in 1980, U.S. [gross domestic product] would have been a larger proportion of global GDP than it is today," Mr. Kendall said. "That's a huge difference from 1980."
Safe-haven buying buoyed gold prices in 1980 after the Soviet Union's invasion of Afghanistan, and Mr. Klapwijk said some people see a parallel in escalating tension between the U.S. and Iran.
"In 1980 everything was going gold's way...[but] if you look at it in real terms, it's still got a way to go," said economist Jill Leyland of the World Gold Council, adding that further gains were "certainly" a possibility.
Ms. Leyland said the rise of the middle class in China, India and the Middle East is likely to fuel further gains in prices, but not without a "substantial" correction first.
Indeed, with open interest on the Comex market at record levels and an almost uninterrupted rise in gold prices since early September, analysts were almost unanimous in expecting prices to fall back. Open interest is the number of positions outstanding in a market, and large open interest is a sign of liquidity.
"Even at the all-time [nominal] high, I'd be cautious to say that gold can't go significantly higher still," said Mr. Klapwijk, who added that by this time next year, gold could be trading well above $1,000. |
