Gold Bull Market Has Not Come To An End

In the August-issue of Goldletter International I held the view that the gold price was looking for a new buying momentum at a level around $ 620 per ounce. Earlier, after having reached a high of $ 725,75 on May 12, representing a 40% increase within just four and a half months, the gold price showed a significant correction of 22% to an intermediate low of $ 567,26 at June 20, before heading back to a level of $ 650 on August 7. Then the gold price dropped again to a low of $ 573,60 on September 15.

This unusually strong volatility has nothing to do with a change in fundamental facts related to demand and supply, and can also not be contributed to a change in the monetary correlation between gold and dollar prices, as the dollar has been quite stable against the euro for some time.

Consequently, the recent gold price correction should be connected with the fall of the oil price from high of $ 78.44 per barrel Brent-oil on August 7 to a recent intermediate low of $ 59.08 on September 22, to be contributed to a lessening of concerns related to Iran's uranium-enrichment program and OPEC having promised to maintain peak oil production.

Lower oil prices have been translated into lesser inflation threat thereby ending a period of Fed tightening. This has resulted in a strong performance of the equity markets of late, with the Dow Jones-index even touching a new high of 11728, the highest level since 14 January 2000.

However, in its recently published World Economic Outlook, the IMF warned of the dangers of resurgent US inflation. Excess capacity in product and labour markets is diminishing, and higher energy prices are feeding into consumer prices, just as the restraining effects of globalization is fading the report cautions.

In this respect, in contrast with earlier cycles, these are not any longer determined by demand and supply from the western world and Japan, but in addition from Asia and particularly China. As a result, while the IMF reduced its 2007 growth forecast for the US from 3.3% to 2.9%, the decline in growth will likely be offset by growth in Asia and particularly in both China and India, where current economic growth is at a level of 11% and 9% respectively. The IMF increased its forecast of 2006 world growth by 0.2% to 5.1% and predicts 2007 growth would be 4.7%.

Although China's economic growth might slow down in the booming east and south coast regions centred around Beijing, Shanghai and Guangdong, compensating growth will come from newly expanding regions.

China has twenty cities with a population figure of more than four million and eighty cities with a population figure of at least 1 million. This creates the basis for a potential middle-class of 200 million people within the next twenty years, which is comparable with the size of the middle-class in the US and European Union.

With Japan having a population figure of just 127 million, China will surpass Japan as Asia's number one economic power house within the next ten years. This makes China much more attractive from an investment point of view than Japan is, also supported by China's strongly growing mineral wealth, in contrast to Japan.

Sustained Asian economic growth will keep driving the current commodity bull market. Consequently, the most recent decline in base metal and precious metal prices is not the end of the bull market, but just another correction like the one in June. Both gold and base metal prices have bounced back again. Market watchers should have a better eye for fundamentals in order to know how to distinct the difference between a correction in the market and the end of a cycle.

Based on the most recent developments, I don't expect another correction in the gold price to occur. Supported by at least a partial recovery in jewellery demand and a positive outlook for retail investment, getting used to higher prices, I expect the gold price to move up to a trading range of $ 620 - $ 640 during the remainder of the year.

At the same time, at a current price level of approximately $ 600, 2006 will be an excellent year for the gold industry with a strong increase in cash flows from producers and record spending in the development and exploration industry.

While in the second half of 2005 the average gold share price increased just 8% from $ 427 to $ 462 compared to the first half of 2005, in the first half of 2006 the average gold spot price boosted 38% to $ 591 compared to the first half of 2005 and 28% compared to the second half of 2005.

In the second quarter of 2006 the average gold spot price at $ 628 was 13% higher than the average of $ 554 in the first quarter of 2006.

By : Marino G. Pieterse

Editor, Gold Letter International

Marino G. Pieterse has been an independent financial analyst and gold specialist for more than 25 years. He is the chief-editor of Goldletter International, the only gold investment market letter in English in Europe focusing on emerging gold regions in the world, as well as reports on individually featured companies and special reports on other metals, including uranium. You can receive Gold Letter International’s reports for free by clicking on the “Subscribe” button.