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Gold Price to Hit $1,500
Charles Gibson, a gold expert at Edison Investment Research, argues in a new report that negative real interest rates (below inflation) in the US and beyond has upset the "leasing" machinery in the gold industry and led to a sustained market squeeze.
This is what occurred in the late 1970s, driving gold prices to $850 and ounce - roughly $1,560 in today's terms. Gold finished last week at $870.
Mr Gibson said the powerful dynamic could lead to a second leg of this gold bull market, even though the metal has already enjoyed a torrid run over the last eight years.
In normal times, gold mining companies sell - or "hedge" - a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 tonnes each year until the start of this decade.
Low real interest rates have caused the process to reverse, creating a shortfall of about 500 tonnes. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.
There are already reports that gold bars are becoming scarce, partly due to fears that futures contracts and other forms of paper gold may not prove reliable if there is a serious break-down in the global financial system. Pure metal -- whether Krugerrands, Maple Leaf coins, or the "five tael biscuit" favoured by the Chinese - entail no counterparty risk.
Mr Gibson says the Fed's monetary blitz will end in another burst of inflation akin to the late 1970s. That is a disputed claim as deflationary forces tighten on the global economy. Some of the big global banks are already calling the start of a bear market. Rarely has the gold fraternity been so schizophrenic.
Gold is expected to climb this week on speculation the decline in prices may boost demand from jewellers and other buyers of the physical metal. Fourteen of 34, or 41 percent, of traders, investors and analysts surveyed by Bloomberg News said gold would advance this week. Eleven of them forecast lower prices and nine were neutral.
Hedge-fund managers and other large speculators increased their net-long position in New York gold futures by 2 percent in the week ended April 14, according to US Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 129,895 contracts on the Comex division of the New York Mercantile Exchange.
Last week gold dropped as the strength of global equity markets eroded demand for the precious metal as a safe-haven investment. Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion dropping 1.2 percent to 1,105.98 metric tons on April 17, the lowest since March 19. The decline in the fund's holdings may put pressure on bullion at the start of the week, according to UBS AG.
"The decline in the SPDR, while significant, does not yet challenge the view that most holders of gold ETFs are in it for the long-term," John Reade, UBS's head metals strategist. "Sustained, large declines in holdings of the SPDR will give us cause for concern."
Gold fell in each of the past four weeks, the longest losing streak since August, on speculation bullion sales by central banks or the International Monetary may depress prices and as US, European and Asian stocks capped six straight weekly gains.
Among other precious metals for immediate delivery, silver was little changed at $11.87 an ounce, platinum lost 1.1 percent to $1,196.75 an ounce, and palladium dropped 0.4 percent to $233 an ounce.