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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Friday, May 8, 2009

Where Is the Price of Gold Headed?

Readers of the Gold Stock Strategist often ask me, "How high will the price of gold eventually rise?" The truth is that I don't know how high it could eventually hit. Some analysts claim they know it will hit $1,600, $2,000, and even $8,000 an ounce. I'm not so sure about those projections. But, here is what I do know.

Gold is hovering around $900 an ounce with fundamental global financial conditions continuing to support bullish expectations for the price of gold. Gold as a safe-haven play has retreated as investors gain a heightened taste for risk are moving back into equities. Replacing the safe-haven appeal for gold is the inflation fear and increasing numbers of investors believe the U.S. and global economies may have bottomed.

China remains concerned about U.S. monetary and fiscal policy driving the value of their U.S. denominated foreign reserves down sharply.

The bond vigilantes are stirring a bit after taking time to swallow the extraordinary $1.8 trillion U.S. budget deficit projected by the Congressional Budget Office.

The U.S. dollar has come down sharply in value over the past month reflecting these concerns.

If China and the bond market are right, higher price inflation should begin to appear by the end of this year, maybe sooner. Have you looked at the recent rise in the price of oil? Spot WTI is now around $58 a barrel today despite extraordinary levels of inventory.

There are a lot powerful forces that can drive the price of gold down including increased central bank & IMF sales/leasing, lower Indian seasonal demand, and increased consumer scrap gold sales. As the price of gold goes up, the stock of gold mined throughout history can quickly come on the market. That makes it very difficult to predict the price of gold too far into the future. However, I do think the price of gold should rise over the next year or two. How high is anyone's guess.

Despite this uncertainty I have to develop an assumption for the price of gold going forward for modeling purposes. Right now, I expect the price of gold to easily end the year above $900 an ounce and possibly cross the $1,000 an ounce mark by end of year given the fundamental forces listed above.

Global interest rate cuts, unprecedented financial bailouts and budget deficits globally, combined with exploding supplies of money can reasonably be expected to create general currency devaluation and a return of higher than average price inflation as early as the end of this year.

Consequently, analyses on the Gold Stock Strategist are now using conservative "price of gold" assumptions equal to $900 an ounce for 2009 and $950 an ounce for 2010.

Don't you wish there was a "price of gold" crystal ball for sale? It would make forecasting so much easier!

Have a great weekend!

Best,

The Gold Stock Strategist

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