First with Financial Comment from Arabia

What is the ‘new normal’ for the gold price?

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With gold north of $1,080 an ounce this morning suddenly the contemplation of very much higher gold prices looks logical and far from ludicrous. Bill Gross coined the phrase ‘new normal’ for an economy with sub-par growth and high unemployment, where does that leave the yellow metal?

Observers are chastened by the experience of July 2008 and oil at $147 a barrel. Then it was only too easy to project $200-250 a barrel, and the Kremlin actually did just that.

Spike or not

Looking back the oil price was in obvious spike territory then but you needed to be brave to call it at the time. Nobody likes to bet against upward momentum and a price spike, just like global stock markets right now.

However, it is hard to see a spike in the current gold price. The decade chart shows a long and gradual rise, with a few setbacks like last autumn. Now if gold were to suddenly zoom up to $1,500-1,600 then you might call that a spike or bubble.

But even at $1,100-1,200 an ounce there would be nothing worth calling a price spike in the gold chart. The price could take a hit if the dollar rallies in a stock market correction as it did last fall. And yet gold has been rallying alongside the dollar over the past week or so, and this inverse correlation is far from absolute in a financial crisis.

Both the dollar and gold are safe havens, and increasingly it looks as though silver is also being treated as a precious metal again rather than an industrial commodity, offering an interesting leverage play on the rising gold price.

Dollar dilemma

It is still hard to imagine gold really powering very much higher with a strong dollar. Perhaps gold bug chief Jim Sinclair is right that moves to form a global currency are about to pull the rug from under the dollar. Then again handled carefully this might boost the dollar by removing uncertainty over its future.

These are exceptionally difficult times to be an investor, and uncertainty is usually good for gold and silver. Precious metals always have a residual value in any case, unlike say shares in the large US banking group CIT whose bankruptcy ought to be casting a longer shadow over US financial stocks.

Of course, if the dollar and gold strengthen together it would still be better to hold precious metals which are both priced in dollars as well as rising independently of the dollar. You can see why the Reserve Bank of India is buying gold from the IMF.


Written by Peter Cooper

November 4, 2009 at 8:48 am

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