Gold’s Ascent is Fuelled by Dollar’s Decline, but How High Can Gold Go?
LONDON, September 16, 2011 /PRNewswire/ –
In January of this year the gold bull market had its 10th birthday.
Investors who’ve had the patience and fortitude to hold gold since 18
January 2001 when it made its low of $257 have been richly rewarded since
today the yellow metal trades at $1,784 an ounce.
A 7 fold move in a little over a decade certainly isn’t bad but given
that this bull market shows no sign of stopping, the question is: How High
Will Gold Go?
In order to answer this question, it’s first necessary to understand
what’s driving gold.
What’s Driving Gold?
Gold has two primary drivers, currency debasement (which shows up as
inflation), and interest rates.
As a response to its unsustainable levels of state and federal debt, and
in an attempt to stimulate economic activity, the United States has adopted
a deliberate policy of currency debasement.
As with any market currency prices are set by supply and demand and as
the Federal Reserve creates more dollars their value falls, and since gold
is denominated in dollars, as the dollar falls, so the price of gold rises.
Gold then is the anti-dollar, and gold’s decade long advance runs counter to
the dollar’s decade long decline.
Back in 2007 the US dollar index [DXY] broke down through 80 – a level
which had acted as support for 34 years – and with the likelihood of QE3 not
too far away, the outlook for the buck is distinctly negative. In fact,
famed technical analyst Louise Yamada, has a long-term downside target for
the DXY of 60.
Mark Hanney, Valbury Capital Chief Executive Officer, says “Given the
Fed’s announcement that it will keep interest rates low until at least the
middle of 2013, investors who are long gold and short the dollar might well
feel comfortable staying that way.”
It is just over 40 years since Richard Nixon took America off the gold
standard and over that period the greenback has lost more than 98% of its
value compared with gold. Buyers of gold are simply trying to protect their
wealth by moving out of paper currencies into the ultimate hard currency
that cannot be created at will by central bankers. The question of how high
gold can go is really a question of how low paper money can go.
Gold becomes attractive to investors when the rate of return they can
achieve on their savings falls below the rate of inflation – a condition
faced by most of the world’s savers today. The persistence of negative real
interest rates – a form of financial repression – erodes the wealth of those
holding cash on deposit and forces them to go in search of better returns.
The attraction of gold in this environment is easy to see especially since
gold has risen for 10 years in a row and has returned on average 18% with no
A Different Animal
Although some of the conditions that drove gold in the 1970′s also exist
today – namely high inflation and negative real interest rates – today’s
bull market is a very different animal. Today gold is also being driven by
fears over sovereign debt default, the solvency of the banking system and
the threat of global recession.
Inflation Adjusted High
One popular method for calculating the target for gold is to take the
1980 high of $850 and adjust it for inflation. Many in the mainstream tout
the inflation adjusted figure as being equivalent to $2,400 an ounce in
today’s money but if we use the same methodology for calculating inflation
as was used in 1980, we find the true inflation adjusted high is $5,467.
The Last Gold Bull Market
Another way to gauge the length of gold’s current bull market is to
compare it with the previous bull market which ran from early 1970 to early
1980, exactly one decade. In January 1970 gold was $35 an ounce, ten years
later on 21 January 1980 gold reached an intraday price of $850 – a 24 fold
increase in price. If gold were to match that increase, based on its January
2001 low it would reach $6,245.
Even if gold simply achieves the gains made in the previous bull market,
we can expect a price in excess of $6,000 an ounce. However multi-decade
bull markets almost always end in a mania and in a mania gold could far
This article does not constitute investment advice or a recommendation
to enter into an investment transaction.
Notes to Editors
Valbury Capital Limited was established to provide Asian clients with a
London based broking service fully regulated by the FSA, and to give
European clients a doorway into Asia – one of the world’s fastest growing
marketplaces. Valbury Capital’s investors bring with them over 20 years’ of
corporate experience and their Asian heritage gives it unique market insight
and expertise. Valbury Capital Limited focuses on providing individuals and
institutional clients with a premier service. Go to:
http://www.valburycapital.com for more information.
Trading Foreign Exchange (FX) and commodities such as gold on margin
carries a high level of risk, and may not be suitable for all investors. The
high degree of leverage can work against you as well as for you. It is
possible to lose some or all of your initial investment and to be required
to deposit additional funds and you should not invest money that you cannot
afford to lose.
Valbury Capital is authorised and regulated by the Financial Services
Authority, registered number 540418.
This article can be reproduced in part or full as long as the media
owner creates a link either in the text or reproduces the web address to
SOURCE Valbury Capital