GOLD PRICE NEWS - With the gold price in the midst of consolidating near the $1,200 per ounce level, bulls and bears have been bantering back about forth about whether the price of gold is set to break out to the upside or the downside. At $1,187 per ounce, the gold price is 6.2% off its record high of $1,265 per ounce.
Alan Abelson, in this weekend’s edition of Barron’s presented a bearish outlook for the gold price, based upon the work of Peter Berezin, of the Bank Credit Analyst. Berezin acknowledged that the gold price, in real dollars, is still “ 47% below its 1980 peak.” If it climbs back to its inflation-adjusted high, the gold price would trade at “$2,360 an ounce, or nearly double the current price” according to Berezin. However, the looming threat of the potential dishoarding of gold held in vaults and in gold bullion ETFs is what causes Berezin pause. “Should gold investors become less enthusiastic with bullion, this inventory will hit the market,” resulting in a severe correction in the gold price.
While not sounding an immediate warning signal for a cascading gold price, he expects gold to rise over the next year or so due to low real interest rates, central bank buying, and a “speculative mania.” Berezin highlighted a number of early warning signs that will signal the beginning of a large downward move in the gold price. Falling inflation expectations, rising real interest rates, a waning of the sovereign debt crisis in Europe, a rising U.S. dollar, and a spike in speculation in the gold market are all mentioned in Berezin’s report.
It is difficult to quarrel with Berezin’s outlook for a cascading gold price should the aforementioned list of “early warning signs” materialize. Of course, the big question is: How likely is it that real interest rates will rise, the sovereign debt crisis in Europe will be solved, or the U.S. dollar will resume a new bull trend? The gold price has certainly been rising due to these phenomena and unfortunately the fundamentals suggest that it is highly unlikely there will be any meaningful change to the current macro-economic backdrop.
Given the stubbornly high unemployment rate, struggling housing market, sagging retail sales, and slumping stock market, Fed Chairman Bernanke will not be raising interest rates anytime soon. The prospect of a sustained rise in real interest rates would appear to be a highly improbable scenario. This key driver of the gold price should continue to remain a tailwind. With real interest rates exceedingly low, combined with deteriorating balance sheets at both the state and federal level, it is also unlikely that the U.S. dollar will suddenly stage a dramatic rise. While the U.S. dollar may rise versus the currencies of other nations with similarly poor balance sheets, it will most likely continue to fall versus gold and other hard assets.
Despite the numerous recent predictions calling for an end to the bull market in the gold price, the fundamentals suggest the gold bears will continue to be on the wrong side of a secular move higher.
