Gold Price Future Tied to Inflation?

- April 21st, 2010

One significant factor underpinning the price of gold right now is high expectations of inflation increasing globally. Although many analysts agree that inflationary concerns will provide support for gold prices, some are much more bullish in their price forecasts than others.

By Melissa Pistilli — Exclusive to Gold Investing News

GoldOne significant factor underpinning the price of gold right now is high expectations of inflation increasing globally. Economic indicators out of Asia, particularly China and India, and other developing economies are already pointing in that direction.

“Gold and silver prices should trend higher over the next few quarters, driven by investor buying based on inflation fears stemming from strong economic growth in emerging economies,” explains Frederic Lasserre, head of commodity research at Société Générale.

“Long-term strategic investors may be taking advantage of recent gold price weakness to further build long positions,” reports ETFS Physical Gold (PHAU). “While short term gold price movements will likely continue to be affected by moves in the dollar, longer-term structural concerns about the potential implications of rising government debt burdens for fiat currencies and inflation, will likely keep demand for gold from strategic investors high.”

Although many analysts agree that inflationary concerns will provide support for gold prices, some are much more bullish in their price forecasts than others. A recent example is Sprott Asset Management Chief Investment Strategist, John Embry, who’s never been shy about his bullish sentiments on gold.

In a recent Gold Weekly podcast on Mineweb, Mr. Embry confidently opined that he’d be surprised if gold doesn’t jump at least $500 in the next six months. Rising inflation as a result of measures taken to stave off the threat of sovereign debt was one of the main reasons he offered up as support.

“We are in the early stages of what I think might turn into some sort of a hyper-inflationary condition because there are not enough savings in the world to even remotely service the amount of sovereign debt that is going to be created in the next few years,” explained Embry. “So you are going to see the creation of paper money the likes of which we have seldom, if ever, seen in history. So, as the value of the paper money goes down because of its proliferation, by definition, gold, which is in limited supply, the price of it will go up in these paper currencies.”

And this inflationary environment paired with declining gold production will give life to soaring gold prices over the long-term, according to Embry.  “As inflation rears its ugly head and future demand for gold promises to overwhelm mine supply, gold’s price will launch a parabolic rise from current levels in the near future,” he says. “Gold has much, much further to go.”

There are, of course, those who would dispute Embry’s position. And those that would suggest gold isn’t the only answer to inflation, and perhaps it’s not even the wisest long-term position if one looks back at the history of the gold price as Bloomberg News Columnist, Matthew Lynn did back in a December.

While Lynn doesn’t disagree that government policies to counter debt are bound to lead us down the road to high inflation, he does argue that gold isn’t necessarily the best protection:

“Whether it’s a hedge against inflation depends on where you want to start drawing the graph. Back in 2002, gold was less than $300. If you bought it then, you’d certainly have protected yourself against rising prices — and made a fat profit as well. The 1990s were a different story. Gold started that decade at around $400, and ended it below $300. Not so great. As for the 1980s, forget it: gold lost almost half its value during that decade.”

The moral of the story is, of course, always exercise due diligence in your investments and that applies to gold investing as well. There is profit to be had in the gold market; timing, patience and caution temper the best approach.

Gold Price Action Wednesday

June Gold Futures in New York Wednesday had a trading range of $1136.90 to $1151.70 an ounce.

Support is pegged around $1135 an ounce with resistance at $1146 an ounce. Jaime Greenough, futures analyst at Global Securities, sees June gold moving back into a trading range of $1150 to $1163 soon.

With help from Assistant Editor Vivien Diniz

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