Globe and Mail Update
All that glitters ...
Capital Economics raises this intriguing question today: Is gold(GC-FT1,409.00-6.80-0.48%) heading for a replay of 1980?
Gold (GC-FT)
Gold (GC-FT)
Gold is an "obvious beneficiary" of the troubles in the Middle East and North Africa, and there are many parellels with the highs of early 1980 after the second global price shock, when bullion hit $850 (U.S.) an ounce, said chief international economist Julian Jessop in London.
Adjusted for inflation levels in the United States, that level of January, 1980 is equivalent to about $2,400 today, which "suggests there could still be plenty of upside," Mr. Jessop said in a research note.
The Soviet invasion of Afghanistan marked the biggest geopolitical risk of January 1980, Mr. Jessop said, but noted that gold's peak at that point was "sandwiched" between Iran's revolution and the start of the war with Iraq. The hostage crisis in Iran was also in its infancy, and oil prices(CL-FT98.421.141.17%) doubled in a year.
There are some distinctions between the two eras, notably that in 1980 gold surged amid sharply higher inflation, but also pumped up by a decline in South African output, which then represented 70 per cent of the world's production. And after that peak, gold fell into a 20-year bearmarket.
"Nonetheless, in some other respects the conditions are now more favourable for gold than they were in 1980," Mr. Jessop said, projecting gold to surge to $1,600 an ounce by the end of this year and as high as $2,000 in 2012. Not exactly a replay of 1980, but close.
"The global financial crisis has left serious doubts about the creditworthiness of governments and financial institutions that underwrite paper assets. At the very least, interest rates are likely to remain very low in the advanced economies, thus minimizing the opportunity cost of holding an asset like gold that does not pay any income. We do not expect the major central banks to start to reverse their quantitative easing any time soon either.
"Gold is also now firmly established as a mainstream financial assets, exemplified in the fact that central banks were net buyers in 2010 for the first time in 21 years. The continued rapid growth in emerging economies, including China and India, means that fundamental demand for gold is now stronger too."
Even if the troubles that have raged for weeks in the Middle East ease, Mr. Jessop sees other "economic and financial shocks" that could boost gold, including the fallout from a debt crisis in Japan, the threat of a U.S.-China trade war, and uncertainty over the fate of the embattled euro.
"And even if inflation is unlikely to take off, the havoc that deflation would bring to heavily-indebted economists might prove to be just as supportive for gold."
