Gold News

$5000 Gold "Possible by End-2010" as Central Banks "Debauch Currency", 90% of S.Africa's Gold Reserves Vanish

The Gold Price slipped from fresh all-time highs versus the US Dollar early in London on Tuesday, retreating 1.3% from last night's new record as world stock markets fell for only the fourth time in 11 November sessions so far.

The Dollar bounced on the forex market and crude oil fell after Federal Reserve chairman Ben Bernanke spoke of a "Strong Dollar" in his annual speech to the Economics Club of New York.

Citing 10% unemployment and weak GDP growth, however, he said the Fed "will calibrate the timing and pace of any future tightening [of interest rates from 0%] to best foster maximum employment and price stability."

Touching $1143.74 an ounce late Monday, gold this morning approached new 9-month highs vs. the Euro and Sterling, and reached its best level against the Japanese Yen since July 2008 at ¥3250 per gram.

"Gold is a more stable store of value, over a five-year view, than all paper currencies except the [Chinese] Renminbi," says Percival Stanion, head of asset allocation at Baring Asset Management, whose flagship product is the £1.5 billion ($2.5bn) Dynamic Asset Allocation fund.

"Sterling is still our least favored currency, even after significant falls in value," Stanion is quoted by FT Advisor.

"The multi-asset portfolios at Barings have recently benefited from the surge in Gold Prices and have now sold out of our exposure to Gold Mining and switched into Gold Bullion," he tells Dow Jones Newswire.

After India said it bought 200 tonnes of gold from the International Monetary Fund last month, the Reserve Bank of Mauritius today said it bought two tonnes from the IMF on Wednesday last week, costing $71.7 million.

"A bit of a pullback would not be particularly surprising," says one London dealer in a client note today.

"[But] over the past two-plus weeks it seems that any retracement in the price of gold has presented a buying opportunity for those who are out of the market and wish they were in, or those who are already in the market and wish they were longer."

Writing at Prudent Bear, "When investors lose trust in conventional currencies, because monetary policy appears set to debauch them, gold is the immediately available safe haven," said Martin Hutchinson late Monday.

"During such periods, gold's former importance as a store of value becomes uppermost in the public mind, and its price becomes a major economic indicator.

"We now appear to be at the beginning of another such period."

Forecasting a spike to $2000 per ounce within six months, "The supply of gold from new mining is around 1 million ounces per year LESS than in 1980 and the supply of speculative capital that could flow into gold is many times greater," Hutchinson notes.

"Hence a $5000 Gold Price is possible (though not certain) if present monetary policy is continued or only modestly modified – and that price could be reached by the end of 2010."

Here in London today, new data showed Consumer Price inflation rising sharply in October, pushing the cost of living higher for the first time in 8 months as strong energ prices fed through to the official measures.

"If we do not tighten policy to some degree [but] keep interest rates at their current low levels, inflation is in danger of moving above the [2.0%] target," said Bank of England policy-maker Andrew Sentance in a speech Monday night.

"Inflation is now expected to steadily rise," reports CityWire today, "not least because of the inflationary effects of the Bank of England's £200 billion quantitative easing program" – a program receiving unanimous support from BoE executives to date.

"We are going into a Weimar Republic-type of inflation – get used to it," says bond-fund manager Stewart Cowley at Old Mutual Asset Managers.

The Bank of England has now bought UK government bonds equal to 91% of new gilts issued in fiscal-year 2009 to date and more than one quarter of total government spending.

Germany's Weimar Republic monetized 50% of government expenditure between 1921 and 1923, leading to inflation rates above one million per cent per year. (Learn more about Gold & Hyperinflation here...)

On the gold supply-side, meantime, "The suggestion was made at last week's RBC Capital Markets annual Gold Conference that 'peak' production had been reached in the gold market," says Fast Markets' Bullion Weekly.

"More mature markets such as South Africa and Australia will continue to struggle against falling ore grades, rising costs and tighter safety legislation.

Formerly the world's No.1 gold producer, South Africa in fact has only 10% of the gold-in-the-ground officially cited, says Chris Hartnady, research and technical director of Umvoto Africa, an earth-sciences consultancy in Cape Town.

"[Hartnady] has found that South Africa's Witwatersrand goldfields are around 95% exhausted, and anticipates that production rates should fall permanently below 100 tonnes a year within the coming decade," reports Barry Sargeant at MineWeb.

"South African gold is dying – this is not new news," says RBC Capital Markets' Leon Esterhuizen in London, but "It may be dying faster than we currently believe."

Umvoto's Hartnady says South Africa's "residual gold reserves" after accounting for 2007 production fell to just 2948 tonnes – less than three times the all-time record output of 1970, and below 10% of official statistics.

Meantime in the professional market, gold dealing "loco London" – heart of the world's wholesale dealers – rose both by value and volume in October, new data from the London Bullion Market Association showed on Tuesday.

Averaging well over $65.4 billion per day after accounting for the netting effect of the LBMA's data, last month's wholesale volumes – predominantly dealt "unallocated", with a credit account taking the place of physical metal – rose above the 5-year average of $60bn per day.

The average size of each member-to-member deal also rose, but held 25% below the half-decade average at 10,900 ounces, worth some $11.4 million each.

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Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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