$5000 Gold?

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In a new 68-page report, London-based Standard Chartered analyst Yan Chen writes:

There are very few large gold mines set to commence operation in the next five years. The limited new supply comes at a time when central banks have turned from being net sellers to significant net buyers of gold. The result, in our view, will be a gold market in deficit, even assuming flat growth in demand. With the supply-demand balance so out of kilter, we see the gold price potentially going to S$5,000/oz.

A Standard Chartered team analyzed 345 gold mines and 30 copper/base metal gold mines around the globe, the team estimates annual gold production will be just 3.6 percent over the next five years.

As far as Chinese gold buying, Chen wrote:

Currently, only 1.8 percent of China’s foreign exchange reserves is in gold. If the country were to bring this proportion in line with the global average of 11 percent, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production.

Standard Chartered recommends the purchase of shares in smaller gold miners, for the most upside, but also advises the purchase of physical gold and gold exchange-traded funds.

Reprinted with permission from Economic Policy Journal.

2011 Economic Policy Journal