Gold price forecast for 2005
October 08, 2004
I was at the Denver Gold Forum two weeks ago where
Dr. Martin Murenbeeld gave a morning presentation. If there is one
gold analyst that stands head-and-shoulders above the rest it’s
Martin Murenbeeld -- his website is www.murenbeeld.com.
I’ll start with what you’re probably most
interested in: his forecast for the gold price next year. On a probability-weighted
basis Dr. Murenbeeld expects gold to average $430 an ounce in 2005
with a thirty percent probability of the average price being as
high as $470.
Now, I realize that this forecast is a lot lower than
what many hardcore gold-bugs would like to hear, but keep in mind
that he forecast an average gold price of $405 an ounce for this
year when he was at the Denver Gold Forum last year, and the actual
average gold price so far this year has been just over $400 an ounce.
For all practical purposes he was spot-on.
Also, remember that he is forecasting the average
gold price for the year, not the highest, or lowest, or median gold
price. So don’t despair about a forecast of ‘only $430
an ounce’ if you’re loaded up with gold and gold stocks;
it’s a bullish forecast.
What is going to take gold higher?
Dr. Murenbeeld started with the well-established relationship
between the gold price and the US dollar exchange rate, noting that
the correlation between the gold price in US dollars and the dollar-euro
exchange rate since 2000 is 0.92. According to Dr. Murenbeeld such
a strong correlation between the dollar gold price and the dollar-euro
exchange rate is unlikely to last. His thoughts are that something
else, perhaps the oil price, will start to impact the gold price
over and above currency exchange rates and that that will diminish
the strong correlation we see now.
I agree that the strong correlation between the dollar-euro
exchange rate and the gold price won’t last, although I think
other currencies, such as the Chinese renminbi, or the Japanese
yen, will become more important.
Nonetheless, Dr. Murenbeeld agrees that a weaker dollar
means higher gold prices and a stronger dollar means lower gold
prices. He also mentioned that the US current account deficit, which
is near six percent of GDP, is undermining the dollar. For the dollar
to remain stable in the face of the still growing current account
deficit, enormous foreign capital inflows into the US are a necessity.
At the moment foreigners have to invest about six hundred and fifty
billion dollars a year in the US just to keep the dollar where it
The magnitude of these numbers tends to blunt the
senses. How many people can actually wrap their heads around six
hundred billion dollars? Furthermore, pundits have been belaboring
debt and deficits for decades, and no catastrophe has developed
yet, causing a numb, apathetic attitude towards prognostications
of a falling dollar just because the US trade deficit is soaring.
But in his talk at the Cambridge House Investment
Conference in Toronto last weekend Adrian Day (President of Global
Strategic Management in Maryland) mentioned that to finance the
current account deficit the United States needs to attract more
than eighty percent of the world’s net export capital. Think
about it, eighty percent of net capital being invested in the world
has to be invested in the United States, or else the dollar will
Now, back to Dr. Murenbeeld again. His models show
that if the dollar does not decline, the US current account deficit
could reach one trillion dollars in the next three to four years.
So, if the present current account deficit requires
eighty percent of the world’s net export capital, then a trillion
dollar deficit will require one hundred and twenty-five percent
of the current available net export capital, which is obviously
impossible. So either the dollar has to fall, or the world’s
net available export capital has to grow by twenty-five percent
over the next four years and make its way to the US in its entirety.
I find it hard to believe the latter is going to happen, so my bet
is on the former: a decline in the dollar.
As if this isn’t enough, Dr. Murenbeeld then
went on to explain that the current US budget deficit is likely
to expand dramatically as the demographic makeup of the US deteriorates.
Baby Boomers are heading for retirement. At the moment
there are five workers for each retiree, but as the Baby Boomers
retire that ratio will change so that eventually there will be only
one worker for each retiree. Retirees need pensions and health care
and the government will ultimately have to step in to cover these
costs. That means a growing budget deficit, and that’s without
considering an expansion of the War on Terrorism, which in my opinion
is just going to escalate, and will also add to the budget deficit.
The soaring budget deficit will ultimately lead to
higher taxes and higher inflation. Higher taxes hurt the economy
and that could (should) ultimately hurt the dollar while higher
inflation should also lead to a weaker dollar. And a weaker dollar
means a higher gold price.
On the issue of central banks, Dr. Murenbeeld pointed
out that the Asian central banks collectively hold almost two trillion
dollars in foreign exchange reserves. Most of that is held in US
dollars. Only about 1.3% of it is held in gold (1,930 tonnes).
He makes the point that gold should be used to diversify
these reserve portfolios if only because there are so few alternatives
to the dollar as a reserve asset. If both China and Japan were to
adopt the fifteen percent rule of the European Central Bank they
would have to buy 17,000 tonnes of gold. To put this in perspective,
Europe collectively owns about 12,200 tonnes of gold and the United
States has 8,410 tonnes of gold.
Europe plans to sell no more than 500 tonnes of gold
per year for the next five years but Japan alone can buy 1,800 tonnes
of gold a year just from the interest it receives on its foreign
exchange reserves. And there are strong indications that Japan,
China and other Asian countries are planning to add to their gold
Dr. Murenbeeld wrapped up the morning talk by noting
that there had been two major readjustments of the gold price relative
to US equities in the past one hundred years. The first was after
the Great Depression in 1934 when the gold price was arbitrarily
set to $35 an ounce, exactly five years after the stock market peak
of 1929, and the second was when Nixon closed the Gold Window in
1971, five years after the stock market peaked in 1966.
The latest stock market bubble peaked in 2000. Could
we be ready for another “major adjustment” next year?
It’s certainly not impossible. Richard Russell has often expressed
his opinion that the Dow Jones Industrial Average and the gold price
will again be equal at some point. Both Dr. Murenbeeld and Richard
Russell’s analyses of the gold price versus US equities suggest
that gold could trade at several thousand dollars an ounce.
While Dr. Murenbeeld, in the end, left us with a more
conservative average gold price forecast of $430 an ounce for next
year, he had made it clear that the US economy, US equities and
the US dollar are extremely vulnerable. And that bodes well for
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
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