How much further can the gold bull run?
May 4, 2006
By Ethel Hazelhurst
Johannesburg - Is it a bubble waiting to burst or is it a boom with a long way to run? This is the question investors were asking as gold rose to yet another 25-year high, hitting $676.75 (R4 085) an ounce yesterday.
Commodities bull Jim Rogers, who co-founded the Quantum Fund with George Soros, is looking at levels of at least $800 or $900 for gold and is predicting the bull run in commodities may last until 2018.
"People say the cycle has to turn some time," he said in a Bloomberg television interview this week.
"But some time is going to be a long time coming."
He is clearly a raging bull. "But he has a point," said Econometrix economist Tony Twine. "If gold is anything to go by, inflation-adjusted prices are still ahead."
Gold peaked at $850 in 1980 and Twine calculates that the 1980's inflation-adjusted value of the metal is $2 064.
Gold is part of a broad commodity boom. "But the drivers can be a little different," said JP Morgan analyst Steve Shepherd. "The price is being driven by fear."
The precious metal has gained almost 23 percent since January 9, when Iran said it had resumed nuclear research, according to Bloomberg.
The agency quoted Michael Widmer of Macquarie Bank in London: "If this drags on, gold could move beyond $800 an ounce."
This, of course, does not preclude a sharp fall-back when normality returns to the geopolitical area. And certainly the price is being driven by investors who fear being left behind, as the bandwagon surges forward.
But fundamental factors are likely to support the price at higher levels than it has seen over the past few years. "Real demand from China and India are back in the picture," said Twine. "The former for a safe haven and the latter for jewellery, which supports demand when prices fall."
Shepherd said: "And exchange-traded funds are creating new avenues for investment, which has brought a new type of investor into the market."
Also buying are central banks, which sold gold through most of the 1990s. And supply is not elastic. In other words, it can't easily respond to the rise in demand because there has been a long period of underinvestment. "Producers can't forget the '80s and '90s, when commodity prices were poor, and they will have to believe the higher prices will be sustained before they will invest," said an analyst.
"There have been no major discoveries in gold and nothing to invest in. There are only some suboptimal projects."
While reports of explorations by newly listed Wits Gold sparked interest, its chief financial officer, Derek Urquhart, pointed out that the company was in the early stages of exploration; it would be a while before feasibility studies could be done.
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