“Gold is out of the box,” says Lawrence Williams on Mineweb. It has leapt by around 32% over the past three months, and last week almost hit its 1980 record of $850. Since the bull run began six years ago, it is up 240%. Market conditions have created a “perfect storm” for gold, says Ross Norman of TheBullionDesk.
The main driver has been dollar weakness; as Bloomberg.com notes, gold has had a correlation of 0.77 with the euro-dollar exchange rate over the past month (a correlation of 1 would imply that the two moved in lockstep).
The greenback is under pressure as the weakening US economy has prompted interest-rate cuts, and with another cut expected, “the overall dollar trend will remain downwards”, says Williams. Geopolitical tensions and high oil prices, which bolster gold’s appeal as an inflation hedge, are underpinning gold, while jitters over the credit crisis are fuelling safe-haven buying and providing a further spur for speculators to enter the market.
The fundamentals also look encouraging. As Norman notes, demand has risen over the past few years as the advent of gold funds has made buying easier for retail investors, while global gold production is falling. It has plummeted in South Africa, the top supplier, and peaked in Russia and Canada. Production is likely to slide in future as the diminishing number of new reserves fails to compensate for dying mines, reckons Credit Suisse. The gold market has already been in deficit for the past eighteen years, except for three occasions, with the shortfall in supply being offset mainly by central bank sales.
But these are likely to wither in future, says Credit Suisse. Some analysts reckon central banks have been buying lately to diversify their holding away from dollars, so the market will become tighter as jewellery and investment demand rise. Talk of $1,000 gold in 2007 or 2008 was deemed extreme only months ago, says Williams. But now “it could happen”.