Wikinvest Wire

Wyke: A big revision in the gold price

Tuesday, March 10, 2009

It's not clear which is more intriguing in this Bloomberg interview - Schroders product manager Christopher Wyke's outlook for gold or the shrill tone of Bloomberg's Haslinda Amin.

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So as not to be distracted by Ms. Amin, a careful read of the transcript below is highly recommended since Mr. Wyke's assessment seems to be spot on.

It's a pretty simple formula - a late-2008 - early-2009 price revision as investors re-jiggered their portfolios and then, sometime later this year, the main act begins anew when the fear of inflation returns (i.e., after "the chain catches the sprocket" and all the newly printed money begins to work its magic in the global economy) .
Amin: Hey, it seems like most people are gold bulls right now. Isn't that an indication we're encroaching a gold bubble or perhaps already in one and that's waiting to burst.

Wyke: No, I think you saw a big revision in the gold price last year and gold is certainly below its high of over $1,000 last year and we think that gold has certainly got a long way to go.

Amin: You know what? I mean, don't investors play gold when they're concerned about inflation. Inflation hasn't been a worry right now. Is gold really a safe bet? The way to go?

Wyke: I think people have been investing in gold as a safe haven, as an alternative to stocks. But what's really impressive is that the gold price is up by about 25 percent in the last four months at a time when the dollar's been strong and no one's been worried about inflation. I think, when that turns around, when the inflation concerns arise again, and if the dollar is to fall again, then gold could move very sharply ahead.

Amin: OK, how sharply? How high can gold go? Gold prices quadrupled in the last decade. Jim Rogers told us yesterday it would hit about a thousand bucks an ounce (inaudible) of Commodity Warren says a thousand two this year. What's your own prediction? Where will gold go by the end of this year?

Wyke: think it depends very much on what the dollar does, but, to get to its previous inflation adjusted high, the price it reached in 1980, to get to that on an inflation adjusted basis, it has to get to $1,800. So, I think if we saw a fall in the dollar, and then towards the end of the year people started getting concerned about inflation, then a price of $2,000 an ounce is certainly possible.

Amin: Hmmm...
Haslinda didn't seem very happy about any of those replies.


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Chuck Ponzi said...

Well... in defense, $800 gold in 1980 was a bubble.

For gold to hit the inflation adjusted height of a bubble, wouldn't it by definition be in a bubble?

If if it were, how could one predict the trajectory of a bubble? We don't know where the bubble demand would peter out, and therefore could go to $3000, $4000, or even $5000 and oz. It's a market that is very shallow compared with other asset classes. It could explode, and the more it explodes, the more it attracts. It has nothing to do with fundamental value anymore. Indeed, I can honestly say that there is no asset class that has anything to do with fundamental value any more. It's all a crap shoot with this much money sloshing around the globe.

Hell, we could have a lost decade of deflation and gold could be in a bubble. There's just no way to rationally explain what is happening.


Tim said...

Chuck - once again, I can't really disagree with anything you're saying here - this recent trend is a bit perplexing to me.

Bruno T said...

Huge difference vs 1982 (?) when the gold bubble "popped" Today nobody is going to do squat to halt the massive inflation in the pipeline, as we have become a socialist welfare state 27 years later. Shutting down the printing press and raising rates would be quite different today than then. Volker was hated back then. Do you think anyone in congress or the oval office would take that heat?

I suppose at some point they will seize the stuff since it competes with their monopoly money. THAT might be what pops the bubble.

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