Gold price hits new highs, and could double again

Gold rose to a new record above $1,042 an ounce this week, finally eclipsing the $1,030 mark reached in March 2008. In inflation-adjusted terms it still has some way to go before matching its 1980 peak of $2,300. The catalyst for gold's latest jump was a renewed dollar slide. Among the causes was speculation that China and Middle Eastern states had held secret talks about changing the pricing of oil from dollars to a basket of currencies and gold. The Saudi Arabian authorities denied the story.

What the commentators said

Various versions of this rumour have been heard before, and the plan seems absurdly impractical, said Ulrich Leuchtmann of Commerzbank, but it does "match the current zeitgeist" very well. With the dollar on the slide and its long-term prospects unappealing, its eventual demise as a global reserve currency and what might succeed it has become a hot topic.

But it's not just the dollar that looks dodgy, said Chip Hanlon of Delta Global Advisors. Various central banks are doing the same thing: "trying to stimulate and inflate their way back to growth", with some banks printing money. "It's not like you can hate the dollar and fall in love with the euro or the yen." As paper currencies are being debased, investors are rediscovering that gold is "the ultimate currency" as you can't just print more.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

And with monetary policy so loose around the world, which greatly increases "the risk of a blow-up in inflation in the future", as Adam Farthing of Deutsche Bank pointed out, gold's role as an inflation hedge is back in the spotlight. Central banks should also become net buyers of gold now as they diversify their cash reserves. Given all this, Deutsche expects gold to exceed $1,100 next year, while John Brynjolfsson of Armored Wolf predicts $2,000 gold by 2012 and "it could happen a lot faster".