Gold Price Won't Fall Much Further So No Need To Panic

Don't Panic: Gold Won't Fall Much Further

Date 11/09/2008

The Right Side

Garry White

The gold price hit an 11-month low yesterday and I’ve had a few emails from concerned investors.

My main piece of advice is this: don’t panic.

The overall background for gold is actually bullish.

Economies all over the world are heading into recession. More banking failures are expected as toxic debt poisons balance sheets. Fear of inflation is back with a vengeance. House prices are falling. Iran is posturing and there have been skirmishes with Russia.

Against this backdrop gold should be soaring.

But it is not.

There have been two factors driving the price lower: a rising dollar and the falling oil price. This simply cannot last, as I explain below.

Don’t expect these trends to last

One of the most important questions for the performance of gold going forward is the outlook of the US currency. Is the dollar going to carry on gaining? Or is this just a temporary blip.

In the short term, the answer is probably yes. The dollar will maintain its recent relative strength against major currencies. But I don’t expect it will last for long.

The US economy is not out of the woods. Far from it.

The dollar has risen because the market has taken the view that US economic woes are not quite so horrendous as those in Europe and the UK.

It is also down to the falling oil price. The US is the most oil-dependent economy on Earth. Recent falls in the oil price help the US economy more than any other in the world. It is a sigh of relief

However, I do not expect these trends to last. I expect that the oil price will rise again and the dollar will resume its plunge.

The US economy is broken

The US is swimming in debt and people’s net wealth is falling. Unemployment is rising and the country’s balance sheet would make even the bravest hedge fund manager have palpitations. This will not be fixed any time soon.

Longer-term, the outlook for the dollar is even worse. What will happen when oil is no longer priced in dollars?

Next week, finance ministers from Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates are expected sign a deal to set up a Gulf Monetary Authority. This is a precursor to the formation of a Central bank for the oil-rich states surrounding the Gulf.

Plans are to launch a single currency in 2010, but this may be an ambitious targets. But you can be sure this will happen relatively soon. Iran and Iraq already sell their oil in currencies other than the dollar. Once the central bank is formed it is likely that there would be a rapid move to pricing oil in the new Gulf currency.

The longer-term outlook for the oil price is also bullish. There have been no significant new oil finds for decades, with any new finds likely to be in deepwater or the Arctic. This is very expensive to get out of the ground.

Gold’s fundamentals are also a reason for confidence

The eurozone and UK economies are in or near recession, but this is not the case in the Asian gold-buying nations. The dollar is likely to continue to decline compared with the Indian rupee and Chinese renminbi. These are gold buying economies.

The falling price has definitely brought Asian buyers back into the market. The Financial Times reported last week that bullion imports in Abu Dhabi surged 300% in August on a year-on-year basis.

Turkey saw the highest ever monthly imports last month, while the past five weeks have seen the busiest gold demand from India in 20 years.

Then there’s the supply side to consider. Global gold mine output has been falling for the last 9 or 10 years. And it’s still falling.

Output at major mines in Peru, South Africa and the US are slowing. It’s also never been tougher to permit, build and finance a new gold mine. These rising costs are an important factor to consider.

These costs will give the gold price a floor — and it’s not far from where we are now. According to research from Investec, a price below $750 would force mines to close as their operation will become economically unviable.

So, all in all I think that the long-term bull case is still sound. Dollar strength is a temporary phenomenon and rising costs to actually dig the stuff out of the ground will provide a supply-side floor.

I don’t expect gold will fall much further. In fact, it’s probably a good time to buy.

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Regards,

Garry White
Editor
Smart Commodities UK

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