Or so went JP Morgan’s statement to the US Congress in 1913. Apart from quoting that perceptive line, an article in MineWeb also covers a new report by Erste Bank of Austria that predicts the gold price will be $1200/oz by the end of the year and could exceed the inflation adjusted all time high of $ 2,300/oz if the fundamentals in the report highlights prove accurate.
Erste Bank suggests there are several areas of support to the price but they essentially come down to two issues; first the shape of the financial markets and second the balance of supply and demand.
On the financial front, the massive loss of trust in the financial markets has expressed itself in a number of ways beneficial to the price of gold. In a high inflation environment, gold is seen as a safe haven. Historically when inflation is high and interest rates are low or in negative real territory then this supports a high gold price. With foreign exchange reserves at over $6 trillion there is also the feeling some central banks will hedge their dollar exposure by diversifying into gold assets.
As ore grades have declined over the years and mining costs have increased, particularly power, labor, equipment and regulatory costs, the marginal cost of production has risen to around $600/oz supporting prices for the long term. As the most attractive ore bodies are nearing exhaustion, the potential for rapid expansion of progressively less attractive reserves is decreasing with time. The report also sees growing demand for jewelry in increasingly affluent developing markets a a driver for the metal.
Negative factors are seen as a falling oil price and/or a resurgent dollar, both of which could depress the price but would be unlikely to make it crash. Neither of these is considered likely by Erste Bank and they are recommending that their clients buy gold with a view to the market exceeding $1200 oz by the end of the year. It remains to be seen if their enthusiasm is well founded; one thing we can say is gold has been seen as a safe haven in times of trouble both economically and politically. And if you don’t want to call it trouble, we can at least call it volatile times.