Gold began the new millennium under $300 an ounce and under a cloud of pessimism among even many of its most ardent advocates. Today, some 11 years later, gold has advanced to $1,500 an ounce or thereabouts — and, by my reckoning, it has far to go before reaching its next cyclical peak.
In fact, I expect the price will very likely rise another $200 an ounce this year, reaching the $1,700 level by year-end 2011. This would be a “modest” gain of “only” 19 percent from last year’s closing price and just about 13 percent above recent levels. Moreover, I believe gold will surpass $2,000 an ounce in 2012 as it continues its upward march to even greater heights for several more years to come.
Today, despite record high prices, physical demand in key world gold markets — from the United States and Europe to China and India — has remained remarkably firm despite the record price levels prevailing in recent weeks.
In the past few years, each time gold prices reached big round numbers — $900, $1,000, $1,100, $1,200, $1,300 and $1,400 an ounce – buying interest abated for a while. But now, even with prices at all-time highs around $1,500 an ounce, physical demand remains firm, suggesting that many gold investors believe that higher prices are ahead.
In brief, here are some of the main reasons why I’m looking for much higher prices yet to come:
No. 1: Inflation-producing U.S. monetary policies by the Federal Reserve, irrational U.S. fiscal policies and little progress reversing growth in U.S. federal debt, a depreciating dollar overseas and rising consumer price inflation at home.
Despite all the rhetoric from both political parties, Americans simply are not yet willing to take the tough steps necessary to reign in the federal budget and shrink the country’s immense federal debt.
No. 2: No quick or easy solution to the eurozone sovereign risk crisis, a widening economic schism across the continent, and possibly the demise of Europe’s common currency, the euro, as it exists today.
The growing disparity between the stronger “core” economies (led by Germany and the Netherlands) and the weaker “peripheral” economies (including Greece, Portugal, Ireland and even Spain) will lead to periodic funding crises such as we have seen from time to time in the past few years and capital flight from the euro and the weaker European banks will continue to find a safe haven in gold.
No. 3: Political turmoil in North Africa and the Middle East is prompting some increase in world gold demand. As war ravages in Libya without much chance of quick or orderly regime change, popular protests are now raging in Syria, Bahrain and Yemen, and no one knows where it may stop and what the long-term consequences may be for regional stability and future oil production.