How High Will Gold Prices Go This Year?

With the global economic recovery still facing strong headwinds, The Northern Miner surveyed six metals experts on where they think gold prices are headed this year and next, and why.

John Embry, chief metals strategist at Sprott Asset Management in Toronto:

“I’m in that camp that thinks that gold is going to go up a lot for the remainder of this year and well into next year. To sum up the reasons why, on the demand side, gold is being recognized as money again and that is because virtually every currency in the world is under a cloud. When you look at the budget deficits throughout the industrialized world they have reached the point of no return. It’s a phenomenon that is only going to intensify as we go forward. And it is going to make more people realize that they need both gold and silver as protection against the debasement of their currency.

I object to people that say declining jewelry demand is a factor because jewelry demand always falls when prices go up because jewelry demand is elastic. Serious demand for gold comes when gold regains its traditional role as money. It’s been that way for 6,000 years.

It’s different than the 1970s because this time it is a pure monetary debasement as a result of governments having to create money out of thin air to fill in the gaps between their revenues and expenditures. In the U.S., tax revenues are not covering 60% of their expenditures — that is just Banana Republic type of stuff. It’s not just in the U.S., we’re seeing it everywhere. The Greeks have recently been everyone’s whipping boy but they’re small potatoes. The U.S. just increased its debt limit in early February by US$1.9 trillion to US$14.2 trillion — that was on the heels of increasing it by US$240 billion at the end of December. The U.S. added better than US$2.2 trillion to the debt limit and it’s going to use it. The numbers are just horrifying.

In Canada people don’t seem to talk about it. But our finances have gone very quickly down the flue because the Canadian government is going to run close to a C$60 billion deficit and that’s on the heels of a surplus for two years. To me that’s going to create the sort of demand for gold that has to be recognized by the public and a lot of people still can’t wrap their minds around it.

The supply side is equally badly understood. There are two major factors that are going to ensure higher prices. Production has been going down for the last eight or nine years. It was telling that Barrick Gold’s CEO Aaron Regent referred to peak gold. He described production as being in terminal decline despite record prices. The gold price has gone up for nine years but production has gone down. This is the old peak oil argument. You just can’t get more out of the ground so you’re stuck at the level you’re at.

If my worst fears are realized and people lose confidence in the whole fiat paper currency system, I think the next currency system will have to be backed again with some degree of gold. The U.S. closed the gold window in August 1971 and the amount of paper that has been created in the last 40 years is hard to fathom.

Then there is the factor of the central banks. In the last 15 years, natural demand has far outrun mine supply and scrap supply so consequently, to balance the market and keep the price where it is or where it has been, central banks have had to offload a lot of gold. My contention is that they’re reaching the limit and I think you’re seeing that in the sense that European central banks can sell up to 500 tonnes a year and now they’re selling nothing. At the same time, eastern central banks in countries like India, China and Russia are buying gold. India bought 200 tonnes of IMF gold late last year. Central banks have gone from being major suppliers of gold to the market over the last 15 years to being a source of demand. And with mine supply going down, it is going to lead to dramatically higher gold prices. There could be gains in the gold price conceivably of thousands of dollars before this is all over.

The hardest thing for people to grasp is that it’s not the value of gold that is changing; it’s the value of paper money that is deteriorating. If you go back in history, in every experiment with non-gold backed money, the paper has gone to nothing and I submit that we are accelerating on that route right now. I’m very comfortable with a gold price of US$1,500 per oz. by the end of this year and in the longer term it depends on how badly the financial system gets out of control in the sense that if people really lose confidence in paper money the price can go anywhere. I’m comfortable with US$1,500 per oz. and maybe US$2,000 per oz. in the next 18 to 24 months. That’s all the public has to know. I think everybody should own some gold and some good quality gold shares.

I’m very concerned about the economy. I’m from the Austrian school that says all economic cycles are nothing more than credit cycles. We have just had the biggest and most abusive credit cycle in the history of mankind. Even though the U.S. economy is supposedly recovering, bank lending is collapsing at a rate last seen in the Great Depression.

Patricia Mohr, vice-president and commodity market specialist at Scotiabank in Toronto:

“Gold is interesting but I think the base metals are a lot more interesting! Gold was the tenth-best performing commodity in my Scotiabank Commodity Price index in 2009, but the best performer was lead and the other top three were base metals. I think this year the best performers in the commodity market space are likely to be coking coal, iron ore, potash and other fertilizers, and probably crude oil later in the year.

I think gold prices in 2010 are likely to hold up very well over US$1,000 per oz. and average somewhere between US$1,050 per oz. and US$1,100 per oz. for the year. For 2011, I’m forecasting a gold price of US$975 per oz., which is still a very high, very profitable price for gold, but just a little lower.

Over time, I think investors are going to be more interested in industrial commodities and I think that this year could be the peak in gold prices. You never know, of course, because we are living in a very volatile world now and economic and financial market uncertainty is going to underpin prices for the next several years, but we expect later this year that the U.S. Federal Reserve Board will start tightening monetary policy and when they do, gold prices could move down, at least temporarily. Some of the base metals could also move down temporarily, and then go back up again.

Last year gold on the London PM Fix averaged US$973 per oz. I think that the things that will tend to keep gold prices high, and probably lead to an annual average this year that is higher than last year are just the general economic and financial market uncertainty.

We’ve seen so far in 2010 a great deal of volatility in commodity prices generally, which I suspect will continue through this year. I think one of the reasons that gold has moved up again in the past several weeks is probably the idea that international inflation is going to heat up. Now I hasten to add that there is very little inflation at the moment in the global economy and very little inflation in the U.S. and in fact, the latest CPI number for January was moderating, so there isn’t a lot of inflation right at the moment. But there is probably the perception that in the next several years inflation will heat up as the global economy really fully recovers and on a more balanced basis, with not just the emerging markets recovering but the G7 and European economies also recovering, and I think that sentiment has lifted gold just recently. The January U.S. CPI number is still up 2.7% rounded year over year, but if you look at core inflation, which excludes food and energy, inflation actually fell month over month in January. Now it’s still up year over year by 1.5%, but inflation is at a low ebb at the moment. There
is still probably tremendous competition in consumer goods and business equipment markets, which tends to keep prices down. There is also a lot of excess capability in the U.S. manufacturing sector, which also tends to keep prices in check, so it’s going to be a while before inflation heats up a great deal. Nevertheless, gold buffs think inflation is going to heat up a lot and that has probably pushed up gold recently.

The other factor that is likely to continue to be a positive for gold is the imbalances in the U.S. economy, specifically the huge budget deficit in the U.S., which I think will be very difficult to rein in because the only way you can rein it in is by reducing government expenditure or increasing taxes.

The U.S. budgetary deficit for the 2009 fiscal was US$1.4 trillion dollars. In fiscal year 2010 the forecast is US$1.49 trillion and in fiscal 2011, although it comes down, it is still US$1.22 trillion dollars. It is going to be very difficult to rein in the budgetary balance-to-GDP ratio back to the level that it was in 2008, which is what ratings agencies like Standard & Poor’s and Moody’s would like the U.S. government to do. The deficit in 2008 was only US$459 billion. So it was 3.2% of GDP in 2008 and in the 2010 fiscal year it will be about 10%, falling to 7.8% in 2011. So for the three fiscal years from 2009-2011, the annual deficit is going to be over US$1 trillion dollars each year and will push federally held debt close to 70% of GDP. So I think the concern about the difficulty in reining in the U.S. deficit is probably going to be one of the key supports for gold prices.

I do think that a lot of pension funds and investment funds will probably maintain a bigger portion of their assets in gold than they did 10 years ago, as a hedge against economic uncertainty and inflation, but I think the tightening of monetary policy later this year or possibly delayed until next year will rein in prices.”

Jeffrey Christian, managing director of CPM Group, a precious metals and commodities research, consulting, asset management and investment banking firm in New York.

“We’ve been telling our clients that the gold price may be approaching a cycle peak between December 2009 and April 2010. We wouldn’t be surprised if gold has one more pop up this year to possibly US$1300 per oz. or even US$1400 per oz. But our view is that gold prices may come off and may trade around US$1,000 per oz. or US$1,100 per oz. by the end of this year.

Now that view is predicated on the idea that the Great Recession is ending and that economic conditions and expectations will get better as the year progresses. We’ve put in a big proviso, however, if that doesn’t happen, because there are big political risks out there. Europe is the one that people are focusing on right now. But we really have a problem in the U.S. with a totally paralyzed government at a time when the government has to do something about its serious fiscal imbalances. We’ve got tensions between the U.S. and Iran, which could cause problems. And so there are a number of things out there that could cause investors to continue to be concerned about economic stability as they have been. If that happens the gold price can go higher. It depends on how things unfold. If you have a really critical situation, gold can go much, much higher but our view is that the history of mankind in the last hundred years or so, and really going back hundreds of years, is that we tend to muddle through these problems.

If we go back to the very deep recession we were in 2008 and early 2009 then we could see gold going as high as US$2,000 per oz. and maybe higher. But a worse economic outcome than we expect might not involve reverting to such a critical level. We may well see a stagnant, relatively low-growth situation where debt continues to mount and we have a period of time where gold price moves sideways. When people see that, they say they’re not going to let their guard down and will not stop buying gold, but they’re not as concerned and don’t rush into gold the way they did in late 2008 and early 2009.

If you look at the gold price and you do econometrics as a tool, in- vestment demand is really the key driver in gold prices. That’s why we focus a lot on what causes investors to buy or not buy gold. The answer is economic conditions. So we spend a lot of time looking at the economy to see whether investors are going to want to buy more or less gold. The fact that central banks have gone from being net sellers for most of the last 45 years to being net buyers is extremely bullish. It represents something like a 22 million oz. shift in the flow of gold into and out of the market. So instead of being net sellers of 12 million oz. they’re going to be net buyers of maybe 10 million oz. gold and that’s going to significantly tighten the market’s flow of physical metal. It’s not like the gold does not exist, but the price will have to stay higher if investors want to continue to buy 30- 40 million oz. a year and central banks are buying. Then the gold price has to be high enough to elicit increased mine production or sales of existing bullion, jewelry and scrap.

So our expectation is that prices will stay high enough to spur some investors to sell gold, to meet the demand from others who will be buying. Probably you’ll also see mine production rise. You saw about a 2.7% increase in mine production in 2009 and you’ll probably see a 2.8% mine production increase in 2010. All of these exploration and development efforts are finding gold. They’re not finding it as quickly but there are tremendous amounts of gold out there. If you look at the reality of gold geology there is a tremendous amount of gold that is yet to be discovered. If you look at the gold reserves that companies report, the amount of gold we mine has doubled since 1980, and known reserves have been stable for 30 years. So we have been able to find replacement reserves for the amount of gold we have mined since the 1980s. We’ve seen a tremendous increase in mine production and there are vast tracts of the world that have not been explored for gold yet. If you look at what’s going on right now, you’re finding people finding mineable gold next to existing elephant country. So I don’t buy into the peak gold theory at all. It doesn’t stand up to geological reality. The bigger risk to future mine production growth in our view is resource nationalism. There are constraints on mine production growth, but those are almost universally political, economic, technological and logistical; they’re not geological.”

Nic Brown, head of commodities research at French investment bank Natixis:

“Our view is a little bit non-consensus. Gold has had a spectacular run over the last nine years and we think this is starting to get a little long in the tooth and that it’s probably going to correct, perhaps a lot lower. Over the last few years, there have been good reasons why people have been buying gold, but in most cases the underlying logic behind these reasons is now beginning to move into reverse.

If you see gold as a safe haven in times of economic uncertainty, we’ve had a few crises in the last year or two and gold has performed very, very well as a store of value. Gold hit a record in terms of euro-denominated prices during the recent Greek crisis. That goes to show what an excellent haven gold has been in times of crisis. We just think we are probably beyond the worst of it and consequently if you are buying gold now to safeguard against something unpleasant happening it’s probably already happened.

The second argument for buying gold has been the weak dollar. A lot of people have been investing in gold as an alternative to the dollar. The dollar has gone from a high in 2002, declining to lows in 2008. Looking forward we’re not at all sure the dollar is going to be as weak. If you look at other major currencies — the Euro, the yen and sterling — all of them have got major problems of their own.
From where we are now, it’s hard to see how the U.S. dollar is going to weaken a great deal further. And that is unlikely to help the price of gold.

Then there is the argument about central bank liquidity. Asset prices have benefited enormously from the amount of liquidity that has been pumped into the global economy via low interest rates and quantitative easing. If you look at the opportunity costs of investing in gold, that opportunity cost diminished to almost zero in the recent past. But now central banks are beginning to look at exit strategies. We’ve had interest rate rises in Australia, as well as mid-February’s hike in the U.S. discount rate (the emergency lending rate it charges banks) and a little tightening in China both in terms of interest rates and in terms of reserve ratio requirements. For us it’s just the beginning of the end of easy liquidity and as a consequence we think that what has been a support for gold in the past will be a headwind going forward as central banks begin to tighten and interest rates rise.

Then there are the supply fundamentals. For many years you’ve had very little investment in mines thanks to ultra-low gold prices in the late 1990s. But with the rise in gold prices since 2004 there has been progressively increasing amounts of money invested in new mines. In 2009 we started to see a return on that investment in terms of higher global gold output. So gold output in 2009 was around 8% up year on year and we would argue that this will continue this year and next. We think there will be an increase in global output of newly mined gold in the region of 7-10% per annum. So the supply fundamentals that were very supportive of the gold price five years ago are really quite different now.

If you look at what gold miners have been doing themselves, a lot of gold mining companies have recently been buying back their forward hedge books. Look at Barrick Gold, who bought back its entire forward hedge book late last year. That helped gold prices spike sharply higher. We look around the gold industry and we see very, very few gold mining companies that have any kind of hedge in place. The only gold major that has it is AngloGold Ashanti with a little less than 4 million oz. and they’re trying to reduce that as fast as they can. Once that’s gone the gold industry is completely unhedged and for us that is an extremely one-sided and potentially myopic approach for gold miners. We accept they’ve been under a lot of pressure to ensure that their equity valuation is as positively aligned to the price of gold as possible. But we’re not sure gold miners necessarily want to be in that position if gold prices go down. So that could turn around as we go forward as well.

The last reason for buying gold is the question of central bank buying. This is something that clearly has been taking place. You had India buying 200 tonnes from the IMF late last year and a few others either buying from the IMF or in the open market. China announced that it had increased its holdings from 600 tonnes in 2003 to over 1,050 tonnes in December 2008, so there is a lot of central bank buying taking place. If you think that will continue and that China and other Asian central banks will continue to diversify out of the U.S. dollars that they accumulated after the currency crises of the late-1990s towards gold then potentially gold prices can continue to rise for a little bit longer. But we would be very reluctant to buy gold based purely on the fact that central banks are buying it. If you look at the low of the gold cycle back in 1999, when gold prices were at rock bottom because of central bank selling, it wasn’t a particularly good strategy to follow central bank policy. That was a turning point in the cycle. We are concerned that if you are buying gold now based on China and other Asian central banks buying, you are more likely to be getting in at the top of the market rather than buying a rise that is going to take it to US$1,200, US$1,300 or US$1,400 per oz.

We think the average gold price for this year will likely be below US$1,000 per oz. and it could end up closer to US$950 per oz. or even lower.”

Nick Barisheff, To r o n t o-based president and chief executive of Bullion Management Group Inc.:

“Typically when people say gold is overvalued they’re starting from the point of view that gold is a commodity rather than a monetary asset. If you are a jewelry buyer you don’t want to buy at these prices, but gold’s primary purpose is as a monetary asset. It’s been that way for 3,000 years and it remains that way today. So today when central banks are printing money and depreciating their currencies, it’s inappropriate to say that gold is overvalued. For gold to be overvalued, central banks need to stop printing more money and currencies have to be much stronger than they are now. Gold still is money and not just a commodity. Gold is traded on the currency desks of all banks and brokerage houses so you’re trading gold in the same way you’re trading dollars, yen, won, euros and so on.

According to the London Bullion Marketing Association’s latest figures, turnover in London is US$24 billion a day in physical gold. Turnover isn’t the volume of gold, it’s the net difference between the 10 market-making members of the LBMA. The volume, though, is estimated at somewhere between five to 10 times that amount.

Central banks have always held gold in their reserves and while there has been a lot of disinformation about central bank selling, the total reserves haven’t really declined that much. In 1980 central banks held 30,000 tonnes and today it’s 28,000 tonnes so the numbers have been relatively stable throughout the years. But in 2009 the central banks have become net buyers again. India bought 200 tonnes in the fall of 2009, China has quietly added 454 tonnes, and Russia added 130 tonnes. The U.S. has never sold gold.

The question is ‘how much money will governments and central banks print?’ With the greater number of dollars they print, the currency weakens more. And this is not about to stop anytime soon. You just have to look at the U.S. budget deficit. In 2008 the U.S. set a new budget deficit record of US$440 billion. In 2009 it was US$1.5 trillion. But the U.S. debt last year increased by US$1.9 trillion so there was an additional US$500 billion of off balance sheet deficit. So the off balance sheet deficit was more than the entire deficit in 2008.

It’s not just the U.S. that is printing money. All governments are doing this in some form or another. There’s nothing on the horizon that suggests this will end anytime soon.

Eventually this will result in an increase in interest rates, then the situation will become even worse and then they will have to crank up the printing presses even faster.

The reason that the gold price goes up is because investors lose confidence in financial and monetary assets. If people think gold is like copper or zinc they’re missing the point. It’s not a fundamental supply and demand question. With gold, the primary commodity demand is jewelry but, in fact, jewelry demand drops when the price of gold goes up, which it did last year. Jewelry demand has been overtaken by investor demand.

As investors start losing confidence in paper money, you’re going to have a greater shift to gold as the ultimate safe haven. So you have to look at how much available gold there is and how much above-ground gold there is. Mine supply has been declining and mine supply-to-demand has been in deficit for more than a decade. Above-ground stocks, in rough numbers, are about 153,000 tonnes and 96,000 tonnes of that is not in bullion form — it’s the gold in the Vatican and the Hermitage; it’s not bullion and it’s not going to become bullion. Of the remaining approximately 53,000 tonnes of bullion, roughly 29,000 tonnes is held by central banks and 29,000 tonnes or $900 billion is held privately. Of the privately held gold, most of it is owned by very wealthy families — Saudi princes and kings
and the like — and they don’t sell regardless of the price. So there’s very little above-ground gold that really can be deployed and at the same time we have mine production declining.

If you look at the other side of the ledger in terms of financial assets such as stocks, bonds and treasuries — those stand at about US$150 trillion. Privately held gold is about US$900 billion. If 10% of these investors get nervous and want to move into gold, that’s US$15 trillion of available money trying to buy US$900 billion in privately held gold, which means the price of gold would have to go up fifteen-fold even if all of the privately held gold was available for sale. Gold is a long way from being overvalued or in a bubble, it has potentially a huge way to go if current trends continue or accelerate and they look like they are continuing and accelerating. This is why you see the bigger funds like Soros, Greenlight Capital, Paul Tudor Jones, all buying gold for the first time. That’s why last year we had the Chinese government recommending to its people to start buying gold for their protection. And if 1 billion Chinese each buy 1 oz. gold the price goes up a lot.

Currently gold makes up about 2% of China’s total reserves. To move to a reasonable level of 10% it would take 25 years of Chinese production. China is now the biggest gold producer in the world, but even if it kept all of its own production, it would still take China 25 years to get its gold reserves to the point where it would make up 10% of total reserves.

I think we’ll see US$1,500 per oz. gold this year. Next year it will just keep climbing and accelerating and this process won’t stop until governments around the world have a real crisis or change their policies. There isn’t a single example of fiat currencies not ending in hyperinflation and becoming worthless. This is going to happen again and it’s a question of timing. The U.S. dollar isn’t going to be the first one to collapse because people will be moving from weaker currencies to U.S. dollars but eventually the same thing will happen, you can’t just keep printing endless amounts of money without this happening.

Last week China started selling treasury bills, but treasury bill auctions are not well-attended these days and the Fed has to monetize what doesn’t get sold at an auction and that money is deposited in the banks. The banks have been sitting on the money and it isn’t flowing into the system, so reserves are very high and eventually when the banks do get going we’re going to see rapidly increasing inflation. Buy gold.

As individuals, all you can do is protect yourself. The governments are going to do what they are going to do, and the current wave of bailouts and various programs are just creating a huge debt bubble for our kids and grandkids to cope with.

John Ing, president of Toronto investment dealer Maison Placements Canada Inc.:

“I think the gold price could move to US$1,300 per oz. this year. It could even reach US$2,000 per oz. this year but more likely over the next year and a half. Either way, it will definitely go beyond US$2,000 per oz. How much higher I don’t know.

At one time I said US$510 per oz. gold was the peak, and then US$1,000 per oz. And each time the target was reached.

Americans and others have printed so much money and are awash with paper currencies with diminishing values, so people no longer have faith in currencies and in some parts of the U.S., the housing market itself. Money isn’t even money any more.

Any debt must be funded either through borrowing from overseas investors, borrowing from domestic markets, or creating new money, or some combination of the three. In the past, America’s deficits were financed largely by overseas investors, but their enthusiasm waned with the lower dollar, so the Treasury instead filled the vacuum by creating money as well as borrowing large amounts. Crucially, however, American taxpayers, too, are paying for this.

To finance the deficits, there has been an explosion in the money supply aggregates in a blatant printing-of-money exercise. And in creating new money, the Fed has kept interest rates low, inflating bigger and bigger bubbles including a foreign exchange bubble with an economy dependant on the drug of government support. America’s debasement of their currency is no longer acceptable to its lenders, both domestic and foreign. China for example lent huge sums to