Gold at $800 by 2016?

|By Matein Khalid| De Gaulle dissed gold as a “barbarous relic” and Lenin sneered the yellow metal was fit only to “pave capitalist latrines”.

So what?

Gold has been an monetary metal in human history for centuries, back to the time of Pharonic Egypt, the Inca Empire, King Midas and the Spanish conquistadores of Mexico. While President Nixon removed the gold/dollar Bretton Woods linkage in 1971 and inaugurated the era of floating exchange rates, gold has been a hedge against inflation for everyone from Texan oil billionaires to Chinese peasants. In India, gold is held with a mystical reverence it simply does not deserve.

The sad truth is that gold is trapped in a vicious bear market. Gold prices have fallen from $1,930 in September 2011 to barely $1,175 now, a time during which the US stock market has almost doubled. Gold was unable to even hold $1,200 an ounce when rumors of a Troika-Greece debt bust mesmerised the European stock markets. It is tough to be a goldbug, even in the cloistered banking counting rooms of Credit Suisse and UBS. True believers (and their poor clients!) in Dubai have been gutted by gold linked “structured notes”.

There are myriad factors that could cause gold prices to fall to $800 an ounce in the next two years. US economic momentum and the robust payrolls data makes a hawkish Federal Reserve interest rate cycle inevitable. This means the dollar will continue its rampage against the euro, yen, emerging markets currencies and crude oil. A surge in the US Dollar Index, up almost 20 per cent since last June, is the kiss of death for gold. When real dollar interest rates and the US dollar rise, gold tanks, as it did in the early 1980s and late 1990s.

The new Indian BJP government wants to restore faith in the rupee (centuries of inflation and currency debasement under the Mughal emperors, the British Raj and Congress diktat has etched gold in the Indian DNA!) and destroy local demand for gold bullion imports. If India issues a gold linked sovereign bond (it will!), imports will plunge in the world’s largest retail bullion market. The Indian public has hoarded gold for generations, distrusting banks and rural money lenders. This gold hoard could easily come into circulation and slash Indian gold imports by $5 billion. The Indian current account deficit will shrivel and the rupee could (could is not will) soar to 56 against the US dollar. Mark my words. The Finance Ministry hates gold hoarding.

Gold has been trading in a $1,160-$1,230 range in the past three months. However, the higher US dollar and China’s new stock market mania means it is entirely possible that gold prices will fall below $1,160 this summer. The fall in crude oil prices also means that the production cost of gold is now well below $1,200 an ounce. Financial distress in Russia, South Africa and the Arab world means more hoarded gold will add to global supplies. If the US unemployment rate falls below five per cent, as it will this autumn if the current 200,000-plus monthly pace of job creation continues, the Yellen Fed will talk ugly about monetary tightening and accelerate the bear market in gold.

Goldbugs in Dubai, like central bankers in Washington, must become “data dependent” to avoid a cash hemorrhage in gold. I expect Australian gold output will surge this winter, due to mining mergers and the lower Aussie dollar. Note the rise in Evolution Mining’s share price after it acquired Cowal Gold Mining from Barrick and Northern Star Resource’s new mine drilling results. Geopolitics? If five civil wars raging in the Arab world and a new post Crimea/Ukraine Cold War with Russia did not resurrect the gold bulls, nothing will.

Gold is a misnomer as a “precious metal”, after its 40 per cent bear market since 2011. Gold has been de facto leprosy as an investment and store of value. Central bank money printing has led to money gushing into the world’s stock exchanges but gutted gold. Emerging market central banks are buying dollars, not gold. China’s gold imports and jewellery sales are in steep decline. The last gold bear market lasted 18 years. This one is only four years old. Oops!

Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: [email protected]