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Gold at $1,000 an Ounce
We expect gold to surpass its May peak at $731, when hedge funds and commodities funds steam-rolled into commodities. In our view, gold has broken out from the $645 level and appears poised to retest the May high on its way to $1,000 an ounce this year. Gold is an asset class whose performance has lagged other commodities, including nickel and oil. However, the socking away of almost $11.8 billion of gold into the seven ETFs has tightened the physical market, causing gold producers to reverse their gold hedges, adding further to the price rise. In terms of tonnage, ETFs now hold 567 tonnes of gold, which ranks them among the top 10 holders in the world. While central banks have been reducing their gold holdings, private investors have been taking up all the gold that is offered.
The expansion of the middle class in the developing world and the influx of petrodollars into the Middle East are having a positive impact on demand. Indeed, jewelry demand - particularly from India - is expected to take up all of the 2,700 tonnes of production in the West. Total demand for gold is almost 4,000 tonnes annually while mine output is expected to decline over the next couple years as ore bodies get deeper. The election of the Democrats and prospects of gridlock in Washington will further fuel spending. In addition, bullion has become an asset class of growing importance as an alternative investment.
Gold is simply a barometer of investor anxiety and there is much to be anxious about. The liquidity bubble is still growing and with the fiat dollars overvalued from endless printing, gold, which is limited in supply, is a natural hedge and store of value. Gold is an alternative investment to the dollar for many central banks and a superior form of wealth protection. The gold price has risen in the past three years by almost two-thirds, and as with the canary in the mine, the warning signal is clear. The need to fund America's deficit is dogging the dollar. We expect the dollar to sink further, with inflationary consequence this time. Debt on debt is not good.
The Bottom Line
Gold will continue to rise as long as the United States continues to debase its currency. When George W. Bush was inaugurated as President in 2001, the price of gold was $265. Six years later, the price broke through $650. That means the dollar has been devalued in terms of gold by almost 60 percent in almost six years. America's failure to address its growing reliance on cheap money and cheap oil has created systemic risks and economic dependence inconsistent with its super-power status. A dollar collapse is inevitable. Gold's bull market has only just begun.
John R. Ing
Maison Placements Canada
130 Adelaide St. West - Suite 906
Toronto, Ont. M5H 3P5
(416) 947-6040
jing@maisonplacements.com
8 February 2007
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