price could hit $1,500 By Ambrose Evans-Pritchard
Last Updated: 12:11PM BST 20 Apr 2009
aggressive monetary policy of central banks around the world
is playing havoc with the structure of the bullion market,
creating a chronic shortage of gold that may soon push the
metal to fresh records above $1,500 an ounce.
Charles Gibson, a gold expert at Edison Investment
Research, argues in a new report that negative real interest
rates (below inflation) in the US and beyond has upset the
"leasing" machinery in the gold industry and led
to a sustained market squeeze.
This is what occurred in the late 1970s, driving gold prices
to $850 and ounce – roughly $1,560 in today's terms. Gold
finished last week at $870
Mr Gibson said the powerful dynamic could lead to a second
leg of this gold bull market, even though the metal has already
enjoyed a torrid run over the last eight years.
In normal times, gold mining companies sell – or "hedge"
– a chunk of their output in advance through bullion banks.
These banks cover their positions by leasing gold from central
banks. This bread-and-butter trade created excess supply of
500 tonnes each year until the start of this decade.
Low real interest rates have caused the process to reverse,
creating a shortfall of about 500 tonnes. The process accelerates
as rates turn negative, leading to a scramble by market players
to find physical gold.
There are already reports that gold bars are becoming scarce,
partly due to fears that futures contracts and other forms
of paper gold may not prove reliable if there is a serious
break-down in the global financial system. Pure metal -- whether
Krugerrands, Maple Leaf coins, or the "five tael biscuit"
favoured by the Chinese – entail no counterparty risk.
Mr Gibson says the Fed's monetary blitz will end in another
burst of inflation akin to the late 1970s. That is a disputed
claim as deflationary forces tighten on the global economy.
Some of the big global banks are already calling the start
of a bear market. Rarely has the gold fraternity been so schizophrenic.