Gold price suffers post-Greenspan depression

By Kevin Morrison
Financial Times
July 23 2004

The gold price was one of many assets to suffer this week following a surge in the US dollar after an upbeat assessment of the US economy by Alan Greenspan, whose comments rekindled expectations of a Federal Reserve tightening later this year.

Bullion prices fell $15 over the week to $392.50 a troy ounce by yesterday afternoon. The decline brought the metal back below the key psychological level of $400, a level that gold has struggled to remain above since reaching a 15 ½ year high of $430.40 on April Fools day.

If investors believe Mr Greenspan's rosy view of the US economy then the gold price rally, from 20-year lows of about $250 in 2001 to the recent peak, is over. An ending of this trend would also mean that the rally just missed out of being the longest bullion price rally since gold was pushed afloat after the collapse of the Bretton Woods system in 1971.

But the latest gold price boom has not seen the rises of the previous four significant rallies of the 1970s and 1980s. The rally from 1977 to January 1980 was the most dramatic, with bullion gaining more than 700 per cent when it touched its record peak of more than $800. Each gold rally averaged about 30 months, according to research by Michael Lewis, the head of commodities research at Deutsche Bank.

The current gold price performance might look a bit limp, and history may also signal that further gains for gold are limited, but analysts are confident that gold is still on the way up and can exceed its recent peak by the end of the year.

Mr Lewis said the main factor behind the rise in gold prices over the past three years is the fall in the US dollar.

"The dollar rose this week on the prospect of higher interest rates, but higher rates may not stem the fall in the dollar," he said.

"The issue of the twin deficits are not going away," he said. Deutsche Bank forecasts the US current account deficit, which includes trade with its partners, to widen to about $55bn a month by early next year from about $45bn at present.

Paul Walker, precious metals analyst at GMFS, the metals consultancy, said higher deficits could put pressure on the dollar and offset the support from higher interest rates.

Mr Walker said market supply and demand factors are also supporting gold. He said in April, India, which accounts for about one fifth of global jewellery demand, imported 85 tonnes of gold, one of the highest levels ever. Meanwhile, the strength of the rand in South Africa, the world's largest gold producer, is making many gold mines uneconomic, which could lead to lower output.

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