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Why gold will keep going higher

Gold is now over $600 and is expected to continue rising. But what is pushing the yellow metal up?

When the gold price reached $400 an ounce, I was writing that the next step would be $500 an ounce. When it reached $500 an ounce, I expected it to go to $600 and more distantly to move up to the $1,000 mark.

I was prudent enough never to put a date on these figures. One can sometimes make accurate forecasts of the direction of markets, but the timing is another matter. Otherwise we would all be billionaires. Nevertheless, I still expect gold to reach $1,000 an ounce in the foreseeable future.

The price of gold is linked to the price of oil and to the movements of the dollar. The latest spike in the gold price, taking it to well over the $600 an ounce level, has followed a fall in the value of the dollar, caused by the Federal Reserve view that there is no further need to ruin US interest rates. It has been accompanied by a further rise in the price of oil to above $70 a barrel.

If gold is headed towards $1,000 an ounce, oil is probably headed towards $100 a barrel. Certainly gold would fall back if there were a sharp fall in the oil price, which I do not at all expect.

Gold price influence: Political movements

The oil price itself depends on political movements in the oil producing countries. In Nigeria strikes have caused a loss of production. In Iraq, the pre-war level of production has not yet been restored a sign of the ineffectiveness of the U.S. reconstruction programme in Iraq.

The greatest anxiety is Iran. If there were an attack on Iran's nuclear programme, that would lead to a dislocation of Iran's oil output. Estimates of the market consequences go well above the $100 a barrel level. The Iranians themselves have been buying gold in large quantities. According to Gareth Smyth, a Financial Times correspondent in Tehran, "The rush to gold reflects both growing tension over Iran's atomic activities and the destabilising economic policies of fundamentalist President Mahmood Ahmadi-Nejad", whose government took office last August.

Gold price influence: Prosperity of Asian countries

The gold price has been supported by the growing prosperity of the major Asian countries, particularly India and China. The Indians have a tradition of using gold jewellery as a store of family wealth, and the jewellery trade has been absorbing large quantities of current output.

There is also the attraction of bullion as a national or personal reserve. In the world as a whole there has been a growing number of individual multi-million dollar families.

In the United States there are now about a million individuals with assets, other than their houses, of $3 million or more available for investment, and the trend has been similar in many other countries, particularly in the Asia growth economies.

Gold price influence: Suspect currencies

Neither central banks nor wealthy individuals wish to increase their holdings of suspect currencies, and the US dollar has become a suspect currency because of the scale of the US Budget and trade deficits. There are also some doubts about the euro, following the French riots and the Italian election result, which produced a weak government of the Centre Left under Romano Prodi.

All in all, the outlook in the markets is far higher prices for oil and gold, despite the prospect of recurrent profit taking. If there is any shooting in Iran, then prices will go through the roof. That, however, is one reason for thinking that there may not be any attack on Iran. The world's oil supply cannot afford it.

This article first appeared on www.dailyreckoning.com

Recommended further reading:

You can see another article on gold by William Rees-Mogg here: Four reasons for gold to hit $1000 an ounce.  For more expert commentary, see our section on investing in gold.

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