The gold price - is there still upside?
In real terms, gold still has a huge way to go before it
matches its 1980 high point, which suggests good
continuing upside potential.
Author: Victor Matfield - Corporate Finance Manager Randgold Resources
Posted: Monday , 04 Feb 2008
LONDON -
Gold reached its previous highs in 1980, at a time when Soviet
tanks were rolling into Afghanistan, oil prices were being
driven up by instability in the Middle East and the dollar was
falling rapidly amid fears of a recession.
Panicked investors sought refuge in the ultimate safe haven
and the bullion price reached a record US$850 per ounce.
Fast-forward 28 years and it seems to be deja vu all over again: trouble in the Middle East and South Asia, spiralling oil prices, and fears about the US economy and the dollar
are all boosting the gold price.
Yet despite these similarities, fundamental changes in the
gold market mean that the two situations cannot be compared.
In 1980, after surging from US$450 to US$850 in just five weeks, bullion prices collapsed to trade as low as US$300
a year later.
This time round, the high price levels could be sustained
a lot longer - and could go even higher.
One major difference between now and 1980 is that the current price rise has been slow and constant since 1999, with demand coming not only from traditional safe-haven seekers but also from other sources.
Long-term investors now again see gold as a store of value
and a hedge against persistent dollar weakness and rising
inflation.
Their interest is reflected, among other things, in the rapid
rise of gold exchange traded funds (ETFs) which after
an increase of 34% in 2007 now hold 865 tonnes of gold.
The gold price is also supported by strong jewellery buying
by the rising middle classes in China, India and Turkey.
Another key difference is the decreasing supply of gold -
output fell by 7% between 2001 and 2006 -
and the shortage of substantial new projects as a result
of reduced exploration in 1990s.
Rising costs are likely to further constrain the development
of new projects as well as existing production levels.
Furthermore, gold is still relatively cheap by historic measures.
In real terms, the current record price is less than half
1980 high and would have to be well above the US$2,000
level to match it.
With no end in sight to the pressures that have pushed the gold
price upward, the underlying fundamentals for the
price therefore remain very positive.
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Major increase in YD resources!
2.34 million ounces and counting. Impressive!
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God Bless |
