What’s next for the soaring price of gold?

By Alexandra Goss, The Times, London

Gold has glittered particularly brightly this year, soaring to a record high of $1,226 an ounce at the beginning of this month. Despite dropping back since then and finishing the week at $1,110, the gold price has been one of the star performers of the decade, having risen more than 300% since 1999.

Private investors in particular have piled in as a hedge against the financial crisis, the weak dollar and fears that central banks printing money will lead to a spike in inflation.

Demand for 1-ounce American Eagles, the world’s most popular gold coin, has been so strong the US Mint ran out last month. Meanwhile, Harrods, the department store, recently started selling gold bars and said demand had been well ahead of expectations.

However, half the fund managers surveyed for the Bank of America Merrill Lynch Global Research report, published last Wednesday, said the precious metal was now overvalued and would fall next year.

The figurehead for the “bullion bubble” argument is Nouriel Roubini from New York University’s Stern School of Business, who warned last week that prices face “significant risks of a downward correction.”

“The recent rise in gold prices is only partially justified by fundamentals and is, in part, a bubble that could easily burst,” he said. He added that there was “little reason” for bullion prices to rise rapidly toward $2,000 an ounce unless the world enters a period of high inflation or slips into a depression — neither of which he thinks is likely.

Here, we examine the arguments:

… Gold Bulls

Many analysts are positive that the gold price will continue to rise, citing strong market fundamentals.

Catherine Raw, fund manager in Black Rock’s natural resources team, said: “The gold mining industry is struggling with production — it has fallen 8.7% since its peak in 2001.”

Bill O’Neill at Merrill Lynch Wealth Management thinks bullion will hit $1,500 in the next 18 months, driven up by a combination of continued credit risk, US dollar weakness, and commodity market strength. He said: “Although the gold price may be volatile in the short term, the long-term trend is upward, and investors should take advantage of any dips to increase their holding.”

Others also point out that gold is not obviously overpriced compared with its own previous highs in real, inflation-adjusted terms (gold hit a high of $2,200 an ounce in 1980). Exchange-traded funds that track the gold price have been popular with private investors, with $80 billion now invested in the schemes.

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