I read a fascinating article the other day by Ambrose Evans-Pritchard for the Sunday Telegraph The Sunday Telegraph (the slightly stuffy Sunday edition of Britain’s best quality paper the Daily Telegraph). My father worked for them for 20 years and banned the reading in our house of any other newspaper — a rule that still holds sway to this day. Anyhow, the article was regarding the gold price and where the true value should lie. Mr Pritchards’ suggestion was that due to a combination of steadily dwindling world production, rising consumption and the flight to a safe haven as governments devalue their own currencies by flooding the world with cheap money we may be heading for a Gold price closer to $3000/ounce. Apparently this was the price of gold for much of the Middle Ages, adjusted in real terms, only falling when Spain began to flood Europe with gold plundered from the Inca and Aztec civilizations. Since then, at least for much of the 1800-2000’s it averaged $630/ounce in real terms.
Gold has been one of the hardest of the metal prices to call during the last 2-3 years. It has clearly benefited from the relationship the commodity funds put between oil and gold, typically buying 35% gold for every 65% investment in oil. As oil has been bid up so has gold.Needless to say not everyone supports Mr Pritchards’ ideas (tongue in cheek as they are) UBS’ John Reade suggests gold is overvalued by some $150/ounce but that in itself doesn’t mean it will fall. Over the short term it is driven by sentiment not fundamentals.
And just to show how the best research departments can get it wrong Goldman Sachs advised clients in November to short gold following which it moved up $60/ounce! So while a return to the Middle Ages is unlikely, consol yourself with the thought that it would appear that even the best minds in the business can’t agree on where gold will be heading next.