Financial Times: Stars aligned for gold; bullion fund may get SEC OK next week
- Gold market harking back to 1970s
By Kevin Morrison
Financial Times, London
Friday, November 5, 2004
The gold market is starting to resemble its 1970s form
after the price of the precious metal hit a 16-year high
on Friday, making the current rally the second-longest
since bullion was freely floated in 1971.
But unlike the 1970s, when inflation helped boost prices,
this time it is lack of confidence in the dollar that is
causing the metal to glisten again.
"It looks like we might have a real market back," said
Peter Smith, a senior gold trader at JP Morgan Chase
The current rally has lasted since April 2001, or three
months after President George W. Bush was sworn in
for his first term. But the rally followed 21 years of price
declines from the metal's peak at $850 per troy ounce.
Friday's high of $433.90 is about half the record in
nominal terms but nevertheless represents a 70 percent
rise over the past 42 months, a longer rally than the one
that took prices to record levels in the late 1970s.
Michael Lewis, head of commodities research at
Deutsche Bank, said the weakness in the dollar was
expected to remain for several years as the United
States would remain stuck with high budget and trading
deficits for years to come.
"The current gold rally looks set to become the longest
in modern times," said Mr. Lewis. For that to happen the
gold price would have to be higher in May than it is now,
which would make it a 49-month rally, longer than the
one that followed the free floatation of gold after the
collapse of the Bretton Woods agreement in January
1971. That rally lasted until December 1974.
Another factor, pushing gold prices higher is talk of
impending approval by the Securities and Exchange
Commission of the gold exchange-traded fund in the
United States, an initiative backed by the World Gold
Council. This gold investment product mirrors similar
products list in London and Australia and provides a
direct exposure to the gold price without going to the
futures market, buying physical gold or gold mining
Traders said the approval could come as early as next
week and that some hedge funds were taking positions
ahead of an expected launch this year.
"The stars are aligned for gold. There is a perception
that there will be a structural weakness in the dollar for
some time," said Trevor Steel at Baker Steel Capital
Managers, a hedge fund.
Mr. Steel said the fundamentals for the physical supply
of gold were tightening, as the industry had not been
replacing production with new reserves.
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