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

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 is.

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 fall.

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 reserves.

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 gold.

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 investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.


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