Gold: expect $2,400 by next summer

Gold “is back from the wilderness”, says Jack Farchy in the FT. After a year of treading water it has jumped by more than 12% in two months. It is back to around $1,800 an ounce and has reached new record peaks in euros and Swiss francs. The bull market that began in late 2001 should continue.

Not only has the US Federal Reserve launched a further – and this time unlimited – quantitative easing (QE), or money printing, programme, but the European Central bank is prepared to buy unlimited quantities of peripheral bonds. The Bank of Japan has also cranked up the presses again.

The market’s perception is that “expansionary monetary policies, with all their attendant inflation and currency debasement risks, are back on the agenda for an unlimited time and in seemingly unlimited size”, says Morgan Stanley. This is fuelling demand for gold, a traditional currency and store of value that can’t be debased through printing.

The emerging world, notably central banks keen to diversify foreign-exchange holdings, is “a growing source of demand”, says Deutsche Bank. China will overtake India as the main source of jewellery demand this year. Meanwhile, production problems caused by strikes in South Africa suggest that supply is not going to expand fast to meet growing demand.

The technical picture is encouraging too, as US asset manager BlackRock points out. The 50-day moving average recently rose above the 200-day moving average. This so-called “golden cross” formation is a strongly bullish signal and last happened after the Federal Reserve’s first QE programme was launched. If gold’s performance over the next few months mirrors its action back then, prices should hit $2,400 by next summer.

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