-- Posted Thursday, 12 April 2012 | | Disqus

The safe approach to economic forecasting is to take a long established trend and carry it on for another year, and say ‘hey look that is where we are going’. It is, however, rather more controversial to predict that this will be it for a trend that has been running for 12 years.

Yet that is what the forecasters at metals consultancy GFMS are proposing for gold, a peak of $2,000 next year and then some kind of gradual slow reversal for precious metals. They reason that after the hiatus of the US presidential election more deflationary austerity policies will come to the fore with rising interest rates and that will put a cap on the appeal of the yellow metal.

Policy changes

How likely is this to happen? Can democratically elected governments really handle this degree of pain and suffering for their populations knowing that those elected can also be kicked out if they hurt the people they govern? Besides ArabianMoney is far from convinced that we have seen the full impact of the past three years of accelerated central bank money printing just yet.

The inflation has bearly started. Yes fuel and food prices have shot up, hitting the low-income groups hardest. But manufactured goods have hardly begun to increase in price or salaries. The German unions’ current 6.5 per cent salary demand is the highest in twenty years because house prices are shooting up. Rising fuel costs will bankrupt some airlines and the survivors will raise their prices.

It’s a nice thought that central banks can control the money supply like a tap. It is not like that. They can turn it on but they don’t know where the money ends up or when it will appear in the system. Turning off the money has an impact on financial markets but the damage is already done.

What we do know as economic analysts is that money printing on the sort of heroic scale we have seen over the past few years has never, ever failed to produce inflation in economic history. And naturally the more money that has been printed, the more inflation will come.

Therefore if gold hits $2,000 an ounce next year and has a set back it will only be a blip on the road to much higher prices thereafter. For even if austerity and deflation can be implemented then, and we doubt it, there is a great deal of monetary inflation already cooked in the system.

QE10?

We don’t see the central banks of the emerging markets stopping their gold acquisition programs under these circumstances, if anything they will be accelerated as the fear of inflation grows and the ambition to move away from the US dollar for global trade will intensify. The public will also increasingly see the value of money that cannot be printed.

Then there is the perilous state of the global bond markets. Greece and now Spain and Italy are just a story of days to come for other nations as bond holders eventually tire of spiralling deficits and demand higher interest rates. And where will all the money go from collapsing bond markets? Into equities whose profits are being ravaged by inflation? Surely not.

The money will flood into precious metals and how high will prices go then? Way, way beyond $2,000 an ounce for gold is a racing certainty. $500 for silver? Thinking this can just stop overnight is complete nonsense, we would at the very least first see a massive price spike.

-- Posted Thursday, 12 April 2012 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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