Gold Forecast to Hit $1200 This Year on Stagflation Concerns

By: Mark_OByrne

Gold was down $1.40 to $907.00 per ounce in trading in New York yesterday and silver was up 9 cents to $17.32 per ounce. Gold rallied late in Asian trade and in early trading in Europe, gold is trading at $908.95. Silver is trading at $17.26 per ounce.

Gold also rose in British pounds and Euros. The London AM Fix at 1030 GMT this morning was at $910.85 (up from $905.75). Gold fixed at £462.31 (up from £461.46) and €623.19  (up from €621.40).

Gold looks well supported today with the dollar weaker and oil again higher. In the medium to long term, the combination of strong international safe haven demand and decreasing production of and supply of gold in most major producers and particularly in South Africa will likely result in gold going significantly higher in the coming months.

Risk appetite continues in international currency (see FX below) and stock markets with surprisingly good U.S. retail figures and positive data out of Japan continuing to help buoy international stock markets and the dollar. Risk aversion will likely return in the coming weeks and this will likely ensure gold consolidates at these levels prior to reaching $1,000 in the coming months. Our prediction of $1,200 per ounce before year end looks likely to be proven correct once again.

Stagflation and Gold
In the same way that the ‘R' word (r is for recession in case you didn't know) was verboten some 6 months ago so now the ‘S' word for stagflation is verboten despite increasing evidence of slowing growth and increasing inflation and all the classic symptoms of stagflation. The FT reports that risk aversion among fund managers has reached the highest level in more than seven years, and almost a third of managers have taken out protection against another sharp fall in equities over the next three months.

More than two-thirds of the asset allocators in Merrill Lynch's latest monthly fund managers' survey said markets were facing “stagflation”, with above-trend inflation combined with below-trend growth. Stagflation is gold's best friend and saw gold rise some 3,000% or 30 fold from 1971 to 1980 or from $35 to over $850 per ounce. A similar performance by gold would see it reach some $7,500 $250 X 30) in the coming years. While this is certainly possible, it is safe to say that the inflation adjusted high of $2,400 per ounce is a near certainty barring a massive and complete reversal of all the existing supply and demand and macroeconomic and geopolitical fundamentals. This is more than unlikely.

Gold's Performance as a Safe Haven Asset
An example of gold's historic role as a safe haven asset is seen in the following data. The industry performance of Physical Gold Versus the S&P 500 during eleven stock market declines of 15% or more in the Post-War period (since 1946).

Some exposure to gold should be included in all diversified portfolios. In the same way that every major Central Bank in the world continues to maintain huge reserves of gold bullion in order to help prevent systemic or monetary crisis, so too should private investors invest, save and own gold. A good rule of thumb would be a minimum allocation of around 10% to gold and related gold-investments. The wise old Wall Street saying - "Put ten percent of your money in gold and hope it doesn't work", is particularly applicable in today's fast changing and increasingly uncertain environmental, economic, financial and geopolitical world.


FX
Risk appetite continues with high yielding currencies continuing to appreciate against the Yen overnight. Sterling was the notable gainer as bullishness toward the British Pound persisted in the wake of yesterday  poor UK inflation numbers. Sterling gained across the board, pushing the Euro to the low of the month.

The US dollar remained under renewed pressure as it fell against both the pound and the Euro, only really managing to gain against the Yen.

Commodity currencies returned to bullishness after a 24 hour retracement as the Australian, New Zealand and Canadian dollars appreciated against the Greenback. The South African Rand also managed to recover slightly against the dollar, however with today's announcements from Eskom stating that no more than 90% power can be guaranteed till 2012, weakness will quickly return to the Rand.

Support and Resistance
Support is now at $886 which was the low last Tuesday on February 5th. Next support is at the monthly low on January 21 st of $861. Strong support is at $850 to $860. There appears to be strong physical demand internationally for gold in the $890's and thus gold is unlikely to fall far below $890 except for a short period of time.

Silver
Silver is trading at $17.25/30 at 1200GMT.

PGMs
Platinum reached new record highs above $2,000 and is trading at $1985/1995 (1200GMT).
This is far from a bubble as speculative longs remain quite low and far away from higher levels expected at a market top.
Palladium has remained firmer and is trading at $435/441 an ounce (1200GMT).

Platinum is up some 33% in just one month. A similar surge in gold and silver is likely to be witnessed in the coming weeks.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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