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
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
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
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