Why gold could rise another 534%

published 26 June 2006

The gold bull market has entered its second phase - it is now an exciting investment in its own right, not just an indication of dollar weakness, say John Robson and Andrew Selsby at RH Asset Management. But it's still a long way from the mainstream. Just ask yourself - how many people do you know who have bought gold?

It is estimated that the Federal Reserve is creating liquidity at the rate of $1.5 trillion per annum. This compares to current value of all the gold ever mined of $2 trillion. The various central banks' policies of competitive currency devaluations, generated by money creation is not likely to stop. So why should anybody be surprised that gold bullion is in the early stages of a massive new bull market?

During the bear market that followed the 1980 high of $880/oz, the gold price twice rallied to just about $500/oz. That level has recently been exceeded. What has occurred therefore is the completion of a 25-year bottom between the levels of $250/oz and $500/oz.

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Such a major bottom is not likely to top out at only $1000/oz. We expect the gold price to rise much, much higher. There is no way of knowing how high. Some rely on "the cost of a Saville Row suit" test. In 1980 a Saville Row suit could have been bought for one ounce of gold. Today that suit would cost about $3,000. Is that a possible clue as to where the gold price might go?

The bull market started in January 2001 at $250/oz. Until mid-2005 there was a very specific upward trend. Each rally, of which there were three, culminated with a 50% retracement before the next rally started.

Halfway through 2005, gold entered its second important bull market phase which was dramatically illustrated by the fact that gold suddenly became an exciting investment in its own right, not just an inversion of dollar weakness. Gold, from that point, became significantly strong in all major currencies. Not surprisingly, the demand for gold has risen, not a little aided also by the consumers in China and India.

When gold enters its third phase, everybody will be piling in. Readers of this newsletter can do their own little test and consider quietly how many people they know who have significant exposure to gold-linked investments. We would guess hardly anybody. The final third phase is therefore a long way off.

If we are right and the second phase is under way at this accelerated rate, then 2006 will be a stupendous year.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.