Gold to be stronger - SA economists

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Gold to be stronger - SA economists
Garth Theunissen
Posted: Tue, 06 Sep 2005

[miningmx.com] -- GFMS, an independent metals research house, is of the mind that the US dollar would weaken over the next six to twelve months due to fundamental weakness in the US economy, a factor that would give upward impetus to the gold price.

Speaking on the recent gold price rally, Paul Walker, MD of GFMS, said US dollar assets remained overvalued. Potential returns in foreign currency terms “... are starting to look rather suspect and I think this is one of the reasons we’re seeing gold moving up,” he said.

There are essentially two schools of thought on where the US economy is heading. On the one hand, the US could grow its way out of trouble while the other school felt it could not hide from its fundamental economic problems, not least of which is the 6% current account defecit, Walker said.

gold is still the ultimate non-fiat store of value

“The trend is unambiguous in our view,” said Walker. “You cannot get away from the fundamental issues that face the US economy. The US is not going to be able to benignly grow its way out of trouble and as long as this is true, the dollar is going to weaken over a six to twelve month period and gold is undoubtedly going to benefit from this,” he said.

However, local gold analyst Nick Goodwin said Walker was oversimplifying the issue. “It’s not a foregone conclusion that the dollar will weaken,” Goodwin said. “Yes, there are problems with the US economy such as the budget deficit, but the Americans are aware of this, which is why interest rates in the US are on their way up.”

“A lot of people have been talking down the US dollar and talking gold up but I’m not as optimistic as these guys,” he said.

Matthew Turner of Virtual Metals, another UK metals research house, agreed with Walker. The current rally in the gold price will continue and settle at around US$472/oz towards the end of the year, Turner said. “Certainly this rally’s got more legs,” he said. “At the start of this year we foresaw a price of US$472/oz and I think we’ll stick with that.”

Goolam Ballim, chief economist at South African bank, Standard Bank, said that although there was structural weakness in the US economy, the business cycle remained strong. This should provide the dollar with some resilience for the remainder of 2005, he said.

Recent comments by Federal Reserve chairman, Alan Greenspan, should not be discounted, Ballim said. “Alan Greenspan has been calling the US economy robust for some time and he’s been proved correct.

“Greenspan has knocked out all the doomsayers so far. Would you be willing to bet against a boxer who has knocked out all of his opponents in his last ten bouts?” However, economic analysis is a two-edged sword and Ballim conceded that, at some point, there would be an inevitable correction in the US economy. And with Greenspan set to hang up his gloves in January 2006, punters may be more willing to bet against the US economy.

“No economy anywhere in the world has ever been able to maintain a 6% current account deficit indefinitely,” Ballim said. “Either the currency must weaken or rampant consumer spending in the US must be reigned in - or both.”

Walker’s assessment on the outlook for the gold price is not off the mark, Ballim said. But he just doesn’t agree with Walker on the time frame. While Walker sees the dollar weakening over the next six to twelve months, Ballim feels the dollar will stay resilient for the remainder of the year.

“The dollar will consolidate but it won’t fall out of bed,” Ballim said. “Although at some point in time the US economy will cool down I don’t think there will be a rot.” Nevertheless, Ballim said the dollar’s allure as a store of value is not quite what it used to be. Along with sky-high oil prices this lack of dollar sexiness has got investors scrambling for an inflationary hedge, thereby adding impetus to the gold price.

“In many circles, gold is still the ultimate non-fiat store of value,” said Ballim. Given the fact that gold still accounts for 13% of South Africa’s exports, the higher gold price should rub off on the rand and in turn provide the economy with some inflationary relief.

“The rand will enjoy fundamental support from a higher gold price and default support by virtue of the underlying dollar weakness,” Ballim said.