Two views on gold but same conclusions - big increases in price ahead

Two well-known gold analysts gave two different presentations on gold but came to similar conclusions regarding where they expect the metal's prices to be heading. Both analysts believe gold prices will increase and the main driver for this is growth in the US money supply.

Author: Lawrence Williams
Posted: Friday , 21 Sep 2012

Yesterday's Mining Journal Gold Day in London differed from the norm in that as well as seeing presentations for a few companies it started with two keynote presentation on gold and the gold price by Ross Norman of Sharps Pixley and Charles Gibson of Edison Research and while both approached the subject from slightly differing angles their ultimate conclusions on where the gold price is headed were remarkably similar.

Ross Norman was the first to speak and looked at the long term pattern of gold price appreciation having been driven initially by fundamentals, but latterly by the global economy - but also concluded that on the patterns shown by other bull markets the current gold bull could have some way to run yet which would likely see the gold price rise to unprecedented levels, but at the moment very much driven by the huge increases in U.S. monetary supply to which the rising gold price bears a very strong relationship. With Europe and now Japan following a similar path this is not just a U.S. phenomenon.

On the bull cycle front Norman concluded that these bull cycles tend to last for around 17 years trough to peak and on this basis there would be around 7 years or more yet to run. He also commented on the gold bubble argument so popular with gold's detractors and came to the strong conclusion that this is not the case. Gold is not yet following a bubble pattern but he did concede that it does have the capability of meeting some bubble characteristics at some stage in its climb.

A week ago at the Denver Gold Forum, Pierre Lassonde looked at the Dow:Gold ratio as being an indicator of where gold is heading and pointing out that past history suggests that this might end at 1:1 (suggesting that at the current Dow level gold should rise to over $13,000), Norman also alluded to the relationship between the Dow and gold - but used a more conservative 2.5:1 ratio as where things might well end up suggesting that gold might rise to $4,000 with the Dow falling to 10,000.

Other points made were that gold accounts these days for less than 1% of global assets giving it room for advance here, that it is under-owned and that its average run rate over the past ten years or so has been around 17% a year - a level he feels could continue for the next few years at least. In a reasonably benign economic scenario he felt that gold would double in price in the next few years - but should the global economic situation continue to deteriorate it could easily go to double this number.

Following on Charles Gibson commented that real interest rates remain the key and with the FOMC policy of keeping these down until at least 2015 there was little likelihood of any real slippage in the gold price over this period - and probably beyond as there is no real end in sight to the global economic problems. He pointed to remarkable parallels to the 1970s run up in the gold price, but then pointed to the huge differences in scale this time around with astonishingly high increased growth in money supply - which he also pointed to as being absolutely in line with the rise in the gold price. In effect he felt that QE1 and QE2 had only served to replace the money that the global banking system had lost in the previous few years, which was why it had not really flowed back into the general system with the banks reluctant to pass it on. QE3 might thus see some of the Fed's largesse being passed on, but perhaps not enough so to make a real difference.

On forecasting the future gold price Gibson saw the underlying fundamental long term price - perhaps that on which mining companies should base their development decisions - as being at around $1880 by 2014, but that the spot price would rise much higher than this. Indeed he came to almost exactly the same conclusions give or take a little as Ross Norman on this with an upside of $2,000-$4,000 - but not impossible for the price to surge to $10,000 should things go really wrong with the global economy. (Indeed some would argue that they already have!)

Gibson concurred with Norman's conclusions on the gold ‘bubble' saying that the recent price rises represented a fundamental shift, rather than an unsustainable peak and that consequently any real downside in the gold price was extremely limited and thus that the high prices were here to stay . A bubble suggests a rise to a peak followed by a collapse back down to the level at which the bubble started and the likelihood of this happening with the gold price was seen by both speakers as virtually zero. Certainly gold will likely peak one day, but would then find equilibrium at a hugely higher price from that whence it had commenced its runup. That is not a sign of a burst bubble.

So overall we listened to two commentators independently coming to similar broad conclusions on where the gold price is headed, and that the current main driver is probably the growth in US monetary supply. With the latest QE3 being somewhat of an open-ended commitment this does perhaps suggest that the rising gold price too is open-ended - at least while QE3 remains active. But if QE3 doesn't work and not make a substantial dent in U.S. employment figures, what then? Would we have QE to infinity as Jim Sinclair suggests - and does that in turn indicate the gold price rising to infinity as the purchasing power of currencies continues to diminish? One hopes not and that at some stage the global economy returns to a semblance of growth without the need for ever continuing monetary stimulus, but the historical portents are not good.

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