New gold rush as price hits 25-year high

Some experts think bullion could soar further to $1,000 an ounce. But are such rises sustainable, asks Clare Francis

April 16, 2006 - Sunday Times

GOLD hit 25-year highs last week and almost broke through $600 an ounce, sending investors’ hopes soaring that they could see a repeat of the gold fever of 1980 when people queued in the streets to offload heirlooms that had suddenly become valuable nest eggs.

The price has risen 16.8% this year and it ended the week at $598 an ounce.

Many leading metal prices have soared in recent weeks, including copper and zinc. This is exciting widespread investor interest, but would-be buyers face a dilemma: are we in a bubble or a boom? Clem Chambers at ADVFN, a financial website, believes the gold price will hit $1,000 an ounce this year, compared with its all-time high of $850, reached in 1980. He said: “If you are a speculator, gold is looking irresistible at the moment. But only put money in if you can afford to be wrong.”

GFMS, a metals consultancy, thinks the gold price will hit $700 either later this year or early next year.

And its chief executive, Philip Klapwijk, said there was a possibility it could go back to $850 in the next couple of years if there is military action against Iran. However, he does not think the price is sustainable at these levels and believes it needs to fall back to between $400 and $500.

Not everyone agrees with this view. James Turk at Goldmoney.com said: “I think we will go well above $1,000 an ounce before this cycle is over and I don’t expect the price to fall back below $500. We are seeing a repeat of what happened in the 1970s. When gold went past the $50 an ounce mark it never went back, and I think the $500 mark represents the same sort of milestone.”

Jill Leyland at the World Gold Council added that, in real terms, the price of gold is not that high and is only around its long-term average.

Figures from GFMS show that although gold’s all-time high is $850, it would need to reach $2,014 in today’s money, taking inflation into account, to reach the same level.

Demand for gold is outstripping supply and this is pushing up prices. Justin Modray at Bestinvest, an adviser, said: “The attraction of gold, and other precious metals, is that they are some of the few financial assets where value does not depend on the financial strength of any one creditor, unlike equities and fixed interest. They are therefore considered as a store of intrinsic value — a safe haven — in times of financial stress.”

The strong demand for gold is expected to continue, which is why many analysts think the price will rise. The dollar is believed to be overvalued and many analysts expect its price against other currencies to fall.

This will lead to a sell-off and investors moving out of the dollar tend to switch into gold. Because bullion is normally priced in dollars, a devalued dollar also means it will take more to buy an ounce of gold — so the price will appear to go up even though it may not change that much against the euro or the pound.

And if the political problems in the Middle East get worse the price of gold could surge as people search for a reliable store of value.

The industrialisation taking place in China and India is also fuelling demand. Individuals in those countries are becoming wealthier, and as they have more disposable income demand for jewellery and watches is increasing.

Rapid growth in emerging market such as China has also sent the prices of other metals such as copper, zinc and nickel soaring. The value of copper has risen by more than 30% so far this year, reaching record highs; it broke through $6,000 a tonne last Tuesday.

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