Gold Bulls Claim Price Could Double to $3,000 in Five Years

     

Now some fund managers claim the price could more than double to $3,000 (£2,080) per ounce within five years.

Heavily indebted governments throughout the developed world are struggling to fill deficits of black-hole dimensions in public finances by imposing spending cuts and tax rises. Both are expected in Britain’s emergency Budget on June 22 and neither will be popular.

But keeping interest rates lower than inflation and letting the currency take the strain is another way to reduce the real value of debt. You can see why politicians may feel that is the ”least worst” option.

Stealthily robbing savers by eroding the purchasing power of money is less likely to cause riots in the streets than spending cuts, because inflation tends to hit older people hardest while unemployment hits the young.

Governments can devalue their own currencies, but it is harder for them to make more gold. That fact helped prompt record inflows of $484m (£336m) into gold exchange-traded commodities this week, while gold trading volumes peaked at $2.1bn (£1.45bn).

However, the precious metal is not a one-way bet and it slipped back below $1,200 (£830) on Thursday as some investors took profits amid anxiety about an unsustainable bubble in the gold price.

Graham French, manager of the M & G Global Basics Fund, was undeterred. He said: "In a scenario of rising sovereign risk, where government finances are hugely overstretched and central banks have been systematically devaluing paper money, gold’s value as a safe haven and a stable physical currency can only increase over the medium term.

"Against this backdrop, the gold price could go much higher than these already elevated levels. It wouldn’t be too far fetched to see it rising above $2,000, or even up to $3,000."

Mr French’s strategy is based on the belief that things that emerging markets sell will fall in price over the next five years, while things that emerging markets buy will rise in price.

The explanation is that demand from the heavily indebted developed world may remain subdued, while demand from largely debt-free consumers in emerging markets will rise.

Rupert Robinson, chief executive of Schroders Private Bank, said: "Gold is setting record highs in almost every currency, despite headwinds including a strong dollar and monetary tightening in India and China, the main end markets for gold. Today’s economic environment makes gold a must in any client portfolio.

“Interest rates are at historically low levels; central banks are bailing out the system; we have seen a huge amount of quantitative easing; currencies being debased and governments around the world are short of money.

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May 21, 2010