Gold gurus at odds on price fortunes

[miningmx.com] — GOLD is headed rapidly higher – perhaps to $1 400/oz – according to both Paul Walker, CEO of GMFS, and Martin Murenbeeld , chief economist at DundeeWealth Economics.

However, they disagree vehemently over how long it will stay there.

The two gold gurus squared off in a verbal shootout during a lunchtime debate at the Denver Gold Forum, held recently in Denver, Colorado.

More than 1 000 delegates attended this year’s conference, fired up by a gold price setting new all-time records at around $1 280/oz.

Just to give you a feel for the mood at the event, on registration delegates were given a ladybird-sized black and yellow “gold bug’ to wear in addition to the standard handouts and corporate freebies dished out at investment conferences.

Walker – sporting a black Stetson and black gunslinger’s waistcoat – was cast as the gold bear “baddie’ and he rubbed it in putting up a slide querying: “How much bull is there left in the market?’

Murenbeeld – the gold bug “goodie’ decked out in a white Stetson and red bandana – had the entire audience rooting for him on a show of hands, bar one solitary delegate who thought Walker had a point, which concerned the sustainability of the current investment surge into gold that’s driving the metal to new record levels and looks set to continue doing so for the foreseeable future.

Investment demand is now the key driver in the market, having far outstripped fabrication demand – mainly for the manufacture of gold jewellery – which has collapsed as the price of the metal has shot up.

Said Walker: “My problem with investment demand is that it’s fickle compared with jewellery demand, which is more consistent. You have to focus on the flows of funds into the gold market.

When investment demand turns negative – as it inevitably must sometime in the next five years – jewellery demand may not pick up the slack until the gold price drops significantly.

“The last time investment demand turned merely neutral on gold was in 2007 and the price dropped $200/oz in two months. I believe the bull case for gold over the long term is fatally flawed.’

Murenbeeld disagreed, arguing investment demand for gold would stay high and stressing the fundamentally changed nature of the market – in particular, the reformed attitude of the world’s central banks to gold.

Said Murenbeeld: “Fabrication demand is not the be-all and end-all for gold. Private investment and central bank demand for gold were historically more important than jewellery demand.

“We’ve been through the dark ages of central banks versus gold. You have to believe central bank attitudes to gold have changed and they are now once more prepared to hold it. A key difference is that Paul (Walker) doesn’t look at central banks as part of the investment equation, but I do.

“We’re in a huge, long-term commodity cycle where commodities in general and gold in particular are morphing into an asset class. The cycle is being driven by around 2.5 billionn to 3 billion people who are moving up the economic scale, which is super bullish for gold.

“I do agree it’s possible there will be a temporary correction in the gold price at some stage at these record levels, but that doesn’t mean the end of the bull cycle. Gold could well pull back to the extent the average price for one year could be below that of the previous year, and if I had to pick a year I’d say it could be 2013.

“But I don’t think gold is anywhere close to a bubble. I believe the US dollar must decline further and I believe central banks are going to continue to print more money, because they don’t want to get into a recession or depression.’

Walker retorted that the financial crisis would inevitably end.

He said: “The United States economy will get back into growth within two to three years. The Federal Reserve will then have to re-establish its credibility through its interest rate policy. The key variable affecting the future of the gold price is the return of real interest rates, which will be negative for gold because at that point investors will start to query whether they buy gold or some debt instrument.

“That may be some way off – but it’s going to happen. At that point you don’t need to have people actually sell gold for it to go down. You just need them to stop buying. The gold market has to run just to stand still in terms of investment flows required,’ Walker said.

Murenbeeld uses econometric models based on low, medium and high price scenarios from which he derives a “weighted average’ forecast on the gold price.

His latest assessment is that gold will reach $1 310/oz by year-end 2010 and will average $1 211/oz for the 2010 calendar year. He’s also predicting gold will average $1 365/oz next year, during which his “high price’ scenario indicates a 40% probability it could average $1 499/oz.

However, he pointed out the most accurate price predictions about gold over the past 12 months had actually been made by GFMS.

Walker commented: “Everybody thinks I’m a pathological gold bear but I actually don’t have a problem with gold going above $1 400/oz, given the extent of the current economic mess.

“But the end game for gold is going to be the return of a market environment with positive real interest rates. I’ve a suspicion that’s going to happen a lot sooner than many people in this room might think.’