Breaking Views

Gold could soar much higher

In the late '70s, gold prices quadrupled in just 18 months. With demand for commodities high, and interest rates low, could gold hit $5,000 an ounce?

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Martin Hutchinson, breakingviews.com

(breakingviews.com) -- Gold is different from other commodities in many ways. Still, the price of the yellow metal depends on the same three factors as oil or wheat: supply, demand, and financial conditions. Put them together, and the 20% increase since August might only be the beginning.

Start with supply. Production from mines totaled 2,414 tons in 2008, worth $88 billion at the November 16 price. There will be more this year, but less from 2010 onwards. It will take years for new mines to come on stream. Recycling from scrap jewelry and official gold sales were worth $40 billion in 2008, but those sources aren't likely to cough up much more.

One central bank has even become a buyer. India recently purchased 200 tons of gold from the International Monetary Fund. If China decided to put 10% of its $2.3 trillion of official reserves into gold, it would need to buy up almost three years' worth of production, at the current price.

Such a big move isn't likely, but smaller shifts from central banks -- selling less -- could be enough to move the price, as long as other demand keeps up. That's likely. The long period of ultra-easy money may not be undermining the monetary system, but many people fear it might. Some of them will buy some more gold, just in case. With yields on government bonds so low, gold looks like cheap insurance.

Indeed, financial conditions favor all commodities, gold included. Interest rates are low and banks are more willing to support investors and speculators than to lend to businesses and consumers. Besides, commodities look like a good store of value in the midst of unprecedented fiscal and monetary stimulus in a world of still significant imbalances.

When money is easy and demand moves much faster than supply, prices can explode. In 18 months from July 1978, gold went from $185 per ounce to $850. That's $2,400 in today's dollars. And interest rates then were much higher than now. A similar price rise from here would bring gold to more than $5,000 per ounce. To top of page

Company Price Change % Change
Ford Motor Co 14.88 -0.23 -1.52%
eBay Inc 56.97 4.31 8.18%
Bank of America Corp... 17.06 0.04 0.26%
Apple Inc 101.21 1.10 1.10%
Facebook Inc 79.35 0.35 0.44%
Data as of 1:14pm ET
Index Last Change % Change
Dow 17,062.13 -9.09 -0.05%
Nasdaq 4,498.83 -7.02 -0.16%
S&P 500 1,973.77 -4.03 -0.20%
Treasuries 2.49 0.00 0.00%
Data as of 1:30pm ET
More Galleries
7 epic gadget flops From the Microsoft Zune to the BlackBerry PlayBook, the Fire Phone is following in some unfortunate footsteps. More
What I gave up to save $1 million They may have million dollar-plus nest eggs, but they had to make some big sacrifices along the way to get there. Here's what these four savers did without in order to save seven-figures retirement. More
World's Top Employers for New Grads For an exclusive CNNMoney list, research firm Universum Global surveyed college students around the world to see where they most want to work. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.