Martin Murenbeeld, chief economist of the Dundee Group of Companies with a specialty in gold, has no trouble believing the price of gold will reach $850.
“We’re probably in a period of time,” he said recently, “that is a little bit like 1934, when President Franklin D. Roosevelt revalued the gold price from $20.67 to $35 an ounce and a little bit like 1971, when President Richard M. Nixon took the dollar off the gold standard, which allowed the gold price to float freely. We’re in what I believe what could possibly be a fundamental shift in the gold market, which makes a particular price target very difficult to anticipate. The best one can say is that the gold price is going to go higher on an irregular basis.”
Murenbeeld said five broad reasons convince him of a gold price rise ahead. The first is a longstanding relationship between the U.S. dollar and the gold price.
“The U.S. dollar must inevitably decline against many of the overseas currencies,” he said. “It should also decline against the Euro, which is tough to argue because in France they may charge $10 for a cup of coffee, leaving you to wonder why the Euro is so expensive. The reality, however, is we don’t trade cups of coffee; what the U.S. and Europe actually trade leaves the US with a $120 billion trade deficit with Europe. The dollar is accordingly overvalued against the Euro, and it has to go down a lot against the Asian currencies as well.”
Next, the impending retirement of the baby boom generation will aggravate the huge budget deficits of governments. Murenbeeld believes governments will have to decide how to deal with past promises they made to the boomers in their youth – particularly regarding pension and health. Great Britain currently is dealing with a proposal that its national retirement age be pushed back to 68.
“The governments could renege on these promises and they could raise taxes. But this will have the net effect of slowing economic growth. And that brings the monetary authorities into play: if economic growth is slow, the monetary authorities are likely to keep interest rates low. In other words, we’re likely to see easier monetary policies. And that raises the specter of monetary authorities directly or indirectly validating these promises through the printing press. And this would be a huge development for gold.”
Murenbeeld said that mine supply is unlikely to rise in the near future. “Our models show that there is a huge lag between the price of gold and mine output, because of permitting and the red tape, the finding of gold, etc. It takes a long time for high gold prices to stimulate actual output. Furthermore, the gold price at the moment is, believe it or not, still below the average gold price since 1970, in today’s dollars. The price from 1970 to now is about $540 in today’s currency. So miners are not yet getting the average gold price, but they’re certainly feeling it on the cost side. So the margins in the mining industry are still fairly narrow and this is one of the things that is holding up rallies in gold equities. From a miner’s perspective, the gold price really isn’t that high yet; so all of that argues for no significant increase in mine supply.”
With respect to the demand side, he added that new commodity exchanges are opening up. Probably the most noteworthy one is the Dubai commodity exchange, just opened on Nov. 22, 2005. “Dubai postures itself as ‘the city of gold’. It was historically the staging centre of gold smuggled to India, so Dubai has a long history in the gold market. Dubai wants again to become a major gold centre in the world, serving the Middle and Far East. The largest bullion traders live in the Middle East, furthermore, and a Dubai commodity exchange is more efficient for them. The commodity exchange is also in a time zone that is more attractive for Asian traders.” he said.
All of this argues that the demand curve is shifting outward. Asian countries are also getting richer. Murenbeeld says the two countries that are very interested in gold, India and China, are growing by leaps and bounds.
“When you make it easier for consumers and investors to buy gold, when there are better channels of distribution, like advertising, it helps gold demand at any given price level.“
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