Will Gold Reach $1,200 by Year End?

Gold
Gold rose to new record highs yesterday and again this morning above $1,093/oz in what appears to have been continuing reaction to the news that Indian central bank had bought 200 tonnes of gold from the IMF . Gold has also surged in euro and pound terms.

The new record high price and the price at these levels is not extreme given that the India central bank buying shows that there is a huge appetite for gold around these price levels as the average price paid for the 200 tonnes (bought by the Reserve Bank of India) was around $1,045/oz. Indian central bank officials have suggested that they wish to buy another 200 tonnes from the IMF. Thus, gold prices over $1,000/oz are sustainable in the long term and there would appear to be a long term floor under the gold market around the mid $1,000s/oz. Our start of year forecast of gold prices over $1,200/oz in 2009 looks quite possible, especially with two of gold’s seasonally stronger months upon us (November and December).

Gold Less than Half Its Inflation Adjusted High in 1980

The large Indian gold purchase shows that the strong anti-gold sentiment of recent years is abating. The news could potentially spark a bidding war for the rest of the IMF's gold (and indeed the relatively small amount of refined, investment grade London Good Delivery Bars - 400 oz gold bars - in the world) among the various ‘emerging market’ central banks including China, Brazil, Russia, Korea and other countries with large dollar foreign exchange exposure. The Reserve Bank of India had reserves of 557.7 tonnes in March 2009 and now has some 757.7 tonnes which remains a paltry 6.2% of its foreign exchange reserves. This is tiny compared to the European average of 60% of gold to official reserves and the US’ even larger 77% (Federal Reserve’s has retained 8,100 tonnes of gold – the world’s largest holder).

Gold can hold these levels and while it is slightly overbought in the short term, it remains undervalued from a long term inflation and historical basis. Most importantly and often overlooked is the fact that gold remains less than half its inflation adjusted high of 30 years ago at $2,300/oz (see chart above) and is to an extent just playing catch up on a long term basis. What is really behind the recent rally is very robust diversification demand from central banks, hedge funds and pension funds and the bullish outlook of the respected and significant players at the LBMA Conference (in Scotland over the last two days) will do little to diminish gold’s continuing shine.

Gold has experienced yet another strong opening this morning and is currently trading at $1,092/oz, $40 higher than its opening yesterday. In EUR and GBP terms gold is trading at €739/oz and £661/oz respectively.

Silver
Silver is currently trading at $17.29/oz, €11.72/oz and £10.46. Silver remains significantly undervalued historically and versus gold and looks set to play catch with gold in the coming weeks.

Our research article on silver provides reasons for our very bullish outlook for gold’s often forgotten little brother – silver.

Platinum Group Metals
Platinum is trading at $1,360/oz and palladium is currently trading at $328/oz. Rhodium has moved up nicely and looks set to move higher in the coming months – it is currently trading at $1,950/oz.

Disclosure: No positions

Comments

[silverwood:]

Looking at a longer term weekly chart of gold, gold moved from a high of $730.40 to a high of $1033.90 in about two years time. That was a $300 increase. So if history does rhyme then it should blow off parabolically around 1 qtr. 2010 at about $1330. So it is quite possible to be in the 1200s by the end of 09. It certainly appears to be gaining the necessary momentum to make this move possible.

Nov 04 01:08 PM

[Mad Hedge F...:]

cvh ) News broke this morning that, out of the blue, the Reserve Bank of India bought 200 metric tonnes of gold from the IMF for a handy $6.8 billion. The news set the gold market on fire, boosting the December futures $40 to an all time high of $1,088. It is the largest transaction in the barbaric relic since the Alaric’s Visigoths sacked Rome in 410 AD. It has been public knowledge for some time that the IMF was looking to unload 403 tonnes of the yellow metal in order to fund lending to poor countries. Many traders say this threatening overhang is why gold failed to definitively break out to the upside this year, despite six attempts. The expectation was that China would take this hoard as part of a broader diversification away from the dollar. Bringing India into the fray, which had no prior history of stockpiling gold, is a whole new plate of basmati rice. Not only does this raise the prospect of a bidding war with China for more gold reserves, other cash rich emerging market central banks are likely to join the mosh pit as well, no doubt panicked by the ominously rising whirr of printing presses in the developed countries. My short term goal for gold was $1,200, but I now have to raise that to the $1,300 favored by some chartists in view of the new dynamics. If you want to see my long term target, take a look at the chart below, which has gold zeroing in on its inflation adjusted all time high of $2,358.

Nov 04 01:11 PM