FoundingFathers
07-18-2004, 01:42 PM
SINGAPORE --Flared jeans, rising oil prices, surging global inflation and a stratospheric gold price are indelibly associated with the 1970s.
And though some might disagree that flares are really back in fashion, there are striking similarities between the economic environment now and that evident in the early stages of the massive gold price rise of 30 years ago.
Throw into the current mix attacks by insurgents against U.S.-led troops in Iraq, unrest in Saudi Arabia, and renewed warnings by Washington of possible terror attacks on U.S. soil ahead of presidential elections in November - and it's a recipe for further gold price gains.
To be sure, the precious metal isn't likely to rise by anywhere near the same extent it did back then - it rose to $850 an ounce in 1980 from $35/oz in 1968 - but it is now an attractive investment option.
Many analysts say the dollar is back in a bear trend, its daily movements on U.S. economic data of late have been skittish, which adds to the argument that buying gold is a viable lower-risk alternative.
"If you see that the dollar is down on any given day, chances are the gold price rose," said a U.S. bank trader in Singapore. "And with the dollar biased lower for reasons such as budget and current account gaps, and that any benefits (to the dollar) from higher interest rates already priced into the currency, gold can rise," he said.
At 0415 GMT Wednesday, gold was quoted at $403.00 an ounce, up from $392.00 at the end of last month, but down from $415.00 at the start of this year.
A growing number of strategists are bullish on the price of the precious metal for dollar-bearish, safe-haven, and inflation reasons.
As gold is priced in dollars it means that - all things being equal - there is an inverse relationship between the price of the precious metal and the currency.
Specs Not On Gold Bandwagon...Yet
"So I don't think gold will double in price or anything, but I do think there's potential for more dollar weakness which would be at least supportive for gold," Dave Rinehimer, Citigroup Global Markets' director of futures research, told Barron's magazine last month.
Still, he believes gold's upside may be limited to the $420-to-$430-an-ounce region as U.S. interest rates climb.
The Federal Reserve is expected to lift its key target interest rate another 75 basis points by year end to 2%.
While analysts differ on how much further gold can rally, institutions such as UBS say a lack of widespread purchases by speculators during the rally so far suggests there is room for much more upside.
UBS said there is "ample potential capacity" for speculative fund managers to buy gold, should they choose, and it forecast gold at $450/oz by the end of the year, representing a hefty prospective gain of 12%.
Others are even more bullish, though many of these might fall into the category of "gold bugs" - an oft-criticized group of investors who year in year out talk up the prospects of major gains in the price of the metal.
John Lee, editor of Goldinsider.com, has a near-term forecast for gold of $480/oz, and projects a rise to more than $1,000/oz by the end of 2007.
In his research, Lee draws direct parallels between financial market moves in the early 1970s and now, noting that the decline in the dollar and the accompanying upside break in the gold price have already occurred.
While such forecasts of all-time highs for the price of gold might be fanciful, factions of economic theory and history suggest that rising global inflation supports the purchase of the gold price as a hedge.
Still Ultra-Easy Fed Opens Inflation Pickup
Japan looks to be shrugging off years of deflation, reflected in surging government bond yields as its economy strengthens. Korean producer inflation is its highest since before the Asian crisis, and asset prices continue to surge in the U.K. as the Bank of England prepares to hike interest rates further.
Meanwhile, in the U.S., the Labor Department issues the June producer price index Thursday, and the consumer price index a day later. Both the overall and less volatile core CPI are expected to have risen 0.2%, after the overall index surged 0.6% in May, on a big jump in gasoline prices.
A far cry from the average 13% inflation in developed economies in 1974, but with U.S. monetary policy still ultra-easy from a historical perspective, and with rate changes taking up to two years to bite, it might not be too long before inflation is at or above 4%.
Though the prospect of further monetary tightening by the Fed into 2005 will discourage some investors from buying gold, Peter Grandich, editor of the Grandich Letter, an investment-advisory publication, said the dynamics of the gold market are changing.
Grandich said gold is switching from a weak-dollar-driven market to an inflation-driven market.
And though he doesn't think inflation will be rampant, he said its mere presence will be felt acutely because it's been absent for several years.
"That is when gold's appeal as an inflation hedge will pick up and prices will climb back above the highs we've already seen to around $500 an ounce in the next one to two years," he said. "But I believe we are in a new stage for the gold market, where, in addition to geopolitical concerns and strong physical demand, gold will also be demanded as an inflation hedge."
And though some might disagree that flares are really back in fashion, there are striking similarities between the economic environment now and that evident in the early stages of the massive gold price rise of 30 years ago.
Throw into the current mix attacks by insurgents against U.S.-led troops in Iraq, unrest in Saudi Arabia, and renewed warnings by Washington of possible terror attacks on U.S. soil ahead of presidential elections in November - and it's a recipe for further gold price gains.
To be sure, the precious metal isn't likely to rise by anywhere near the same extent it did back then - it rose to $850 an ounce in 1980 from $35/oz in 1968 - but it is now an attractive investment option.
Many analysts say the dollar is back in a bear trend, its daily movements on U.S. economic data of late have been skittish, which adds to the argument that buying gold is a viable lower-risk alternative.
"If you see that the dollar is down on any given day, chances are the gold price rose," said a U.S. bank trader in Singapore. "And with the dollar biased lower for reasons such as budget and current account gaps, and that any benefits (to the dollar) from higher interest rates already priced into the currency, gold can rise," he said.
At 0415 GMT Wednesday, gold was quoted at $403.00 an ounce, up from $392.00 at the end of last month, but down from $415.00 at the start of this year.
A growing number of strategists are bullish on the price of the precious metal for dollar-bearish, safe-haven, and inflation reasons.
As gold is priced in dollars it means that - all things being equal - there is an inverse relationship between the price of the precious metal and the currency.
Specs Not On Gold Bandwagon...Yet
"So I don't think gold will double in price or anything, but I do think there's potential for more dollar weakness which would be at least supportive for gold," Dave Rinehimer, Citigroup Global Markets' director of futures research, told Barron's magazine last month.
Still, he believes gold's upside may be limited to the $420-to-$430-an-ounce region as U.S. interest rates climb.
The Federal Reserve is expected to lift its key target interest rate another 75 basis points by year end to 2%.
While analysts differ on how much further gold can rally, institutions such as UBS say a lack of widespread purchases by speculators during the rally so far suggests there is room for much more upside.
UBS said there is "ample potential capacity" for speculative fund managers to buy gold, should they choose, and it forecast gold at $450/oz by the end of the year, representing a hefty prospective gain of 12%.
Others are even more bullish, though many of these might fall into the category of "gold bugs" - an oft-criticized group of investors who year in year out talk up the prospects of major gains in the price of the metal.
John Lee, editor of Goldinsider.com, has a near-term forecast for gold of $480/oz, and projects a rise to more than $1,000/oz by the end of 2007.
In his research, Lee draws direct parallels between financial market moves in the early 1970s and now, noting that the decline in the dollar and the accompanying upside break in the gold price have already occurred.
While such forecasts of all-time highs for the price of gold might be fanciful, factions of economic theory and history suggest that rising global inflation supports the purchase of the gold price as a hedge.
Still Ultra-Easy Fed Opens Inflation Pickup
Japan looks to be shrugging off years of deflation, reflected in surging government bond yields as its economy strengthens. Korean producer inflation is its highest since before the Asian crisis, and asset prices continue to surge in the U.K. as the Bank of England prepares to hike interest rates further.
Meanwhile, in the U.S., the Labor Department issues the June producer price index Thursday, and the consumer price index a day later. Both the overall and less volatile core CPI are expected to have risen 0.2%, after the overall index surged 0.6% in May, on a big jump in gasoline prices.
A far cry from the average 13% inflation in developed economies in 1974, but with U.S. monetary policy still ultra-easy from a historical perspective, and with rate changes taking up to two years to bite, it might not be too long before inflation is at or above 4%.
Though the prospect of further monetary tightening by the Fed into 2005 will discourage some investors from buying gold, Peter Grandich, editor of the Grandich Letter, an investment-advisory publication, said the dynamics of the gold market are changing.
Grandich said gold is switching from a weak-dollar-driven market to an inflation-driven market.
And though he doesn't think inflation will be rampant, he said its mere presence will be felt acutely because it's been absent for several years.
"That is when gold's appeal as an inflation hedge will pick up and prices will climb back above the highs we've already seen to around $500 an ounce in the next one to two years," he said. "But I believe we are in a new stage for the gold market, where, in addition to geopolitical concerns and strong physical demand, gold will also be demanded as an inflation hedge."