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Analyst: Gold to Hit $850 MoneyNews
(Headlines - scroll down for full stories)
A number of factors could align to send gold as high as $850 per troy ounce, according to one analyst. The current bull run on the precious metal is being fueled by investors' thirst for commodities "both for speculative purposes and as an alternative asset to equities, bonds and cash," says The Financial Times. The newspaper cites Philip Klapwijk of precious-metals consultancy GFMS, who says, "Levels safely over $600 are now in our sights and further hefty gains over the next year or two are quite possible - in the right circumstances, the 1980 high of $850 could even be taken out."
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Gold fever is being supported by expectations of a major slowdown in U.S. growth, Middle East tensions and global inflationary pressures. But as demand soars, buyers have found that gold production has dwindled "because mining companies cut back capital investment during a 1990s price slump," according to an article in The Wall Street Journal. "World gold production peaked at 2,621 metric tons in 2001 - just as the price was falling below $260. As prices finally rose, output actually fell. Last year, less than 2,500 tons was produced," says the Journal. "The reason: Opening or expanding mines can take a decade of exploring, investing and seeking environmental approvals, and shell-shocked companies cut such spending heavily during the long price decline. Some were slow to invest again when prices started climbing." A GMFS survey found that yearly mine production around the world rose only 2% in 2005, while production in South Africa was at its lowest level in 82 years as mines there could not afford to stay open in the face of exorbitant costs. But experts expect the gold production situation to improve. "While start-ups in 2006 will add to the bottom line, 2005's mines ramping up to full-rate production will be the source of further significant volumes," Bruce Alway, a senior analyst at GFMS, told the Times. Editor's Note:
2. Trade Deficit Edges Down The U.S. trade deficit showed some improvement in February as the precarious trade balance with China finally started leaning Uncle Sam's way. The U.S. Commerce Department announced this morning that the U.S. deficit fell to $65.7 billion, a 4.2% decline from January's numbers. While the news is positive, it doesn't mean that the U.S. is out of the woods. "Even with the improvement, the February trade gap was the third-highest on record and the deficit for the first two months of this year is running 13.5% above the pace in early 2005, a year when the U.S. deficit hit an all-time high of $723.6 billion," says the Associated Press this morning. Stung by critics who say that his administration is too soft on China when it comes to trade, President Bush dispatched a team of trade negotiators to Beijing to hammer out a deal with the Chinese earlier this year. Those talks have born fruit, as the U.S. today inked a handful of agreements with China designed to boost U.S. exports. President Bush has said he will raise one of the thorniest trade issues, China's undervalued currency, when he meets next week at the White House with Chinese president, the AP reports. Earlier this week, U.S. and Chinese trade officials announced agreements aimed at narrowing the deficit by cracking down on Chinese copyright piracy, lifting a ban on U.S. beef shipments and increasing market access for U.S. products and services. The Commerce Department says that the trade upgrade reflected a 2.3% decline in imports to $178.7 billion, the second-highest level on record but below the all-time high set in January. "There were declines in imports of new cars and auto parts and various consumer goods including cell phones, furniture, stereo equipment and televisions," says the AP. "America's foreign oil bill edged up a slight 0.2% to $24.6 billion as the price of crude oil rose." U.S. exports slid by 1.2% in February to $112.99 billion, the second-highest level on record after a record high of $114.33 billion in January. Meanwhile, the deficit with China narrowed by 22.7% to $13.8 billion, the smallest imbalance since March 2005. The numbers indicate a significant 19.9% jump in U.S. exports to China to $4.1 billion, the second-highest level on record, the Commerce Department reports. Editor's Note:
3. Will the Fed Go Too Far? That's the warning from Stephen Roach, Morgan Stanley's chief economist. Roach feels that the U.S. central bank, the Federal Reserve, has not adjusted its outlook on how to gauge inflation. Roach is pressing the Fed to switch to a more global view of inflationary pressures, rather than a country-specific view. If not, he warns, the Fed "run[s] the risk of taking real interest rates up to onerous levels that could take a surprisingly severe toll on the global economy." Roach puts forth his "open macro" theory, and substantiates it with research from the Bank of International Settlements (BIS), the "bank for central banks." "The case for open macro," says Roach, "stems not just from the explosion of global flows in trade, financial capital, and information but also increasingly powerful cross-boarder arbitrages driving global markets for labor, physical capital and savings." In terms of inflation, Roach advises that globalization can subdue price pressures "for a lot longer than a closed macro framework would suggest." In other words, even though it may look like inflation is rearing its ugly head, global flows of supply into the economy will likely offset demand, according to the economist. Roach cites a report by BIS researchers Claudio Borio and Andrew Filardo in support of his argument. "In looking at a sample of 15 major industrialized countries, Borio and Filardo find that the global output data gap does a much better job in explaining fluctuations in inflation of individual economies than does the domestic output gap. "In other words," says Roach, "To the extent that there is slack in the global economy, inflationary pressures could well remain in check - even for those nations that have run out of spare capacity in labor and product markets at home."
Roach's warning comes on the heels of a positive March unemployment and manufacturing reports. The unemployment rate fell to 4.7% in March, and capacity utilization for manufacturing reached 80.4% in February. Roach says that this is precisely the time for the Fed to not overreact. Roach points to the nascent recoveries of Germany and Japan and the still untapped resources of China's huge population as reasons for why there is a lot of slack in the economy. Roach points out that long-term bonds may be a good investment at this stage. He says that, using the open macro view, "bond markets may have a very difficult time pushing nominal long-term interest rates much above current levels," and "bond markets could rally quite sharply" in the event that global growth slows. Editor's Note:
4. Hot Stocks When Fed Stops? Although they may disagree on when the Federal Reserve will stop raising interest rates, most Fed watchers and stock market observers see an end to the Fed's credit-tightening campaign this year. Ben Halliburton, CFA and chief investment officer of Tradition Capital Management, LLC in Summit, N.J., says he has been building positions in health-care and consumer-staple companies in anticipation of a Fed pause. "One reason why I like these companies is that their earnings growth should look better in a slowing economy," Halliburton says. "When the Fed stops raising rates it will confirm that the economy is cooling off." Halliburton adds that investors should attempt to adjust their portfolios before the Fed ends its campaign in order to take advantage of some sectors that may have been pressured by interest-rate increases. Editor's Note:
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