The City: 'Getting drunk won't help because there is more to come'

....The gold standard had to be suspended by the European powers in 1914, when the First World War broke out. It has never been fully restored. The Bretton Woods system, which was based on international convertibility into the US Dollar (and thus Dollar convertibility into gold), lasted for about twenty five years before President Nixon suspended gold convertibility in 1971.

   After the Bretton Woods system collapsed, the final link of currencies to gold was broken. This led to a boom in the Gold Price which rose from the old fixed price of $35 an ounce to a high of $860 in 1980, before moving into a 20-year bear market which took the price down to about $260 in the late 1990s. It was at that point that Gordon Brown, then Chancellor of the Exchequer in the United Kingdom, sold a large part of the UK's gold reserve.

   Politicians always get markets wrong, of course, and the Gold Price has now reached a new nominal peak of $914 an ounce – a price which is still only about half the 1980 level in real terms after accounting for inflation in the cost of living.

   Gold still has a significant role in national reserves. In recent years, the reserves of the major Asian economies have been increasing much more rapidly than those of the West. The US Dollar has been falling, though the Euro has been firm. As a result, China has been increasing the holding of reserves in Euros, and has incurred significant losses in the Dollar content of China's holdings.

   In the earlier stages of Chinese growth, this loss on US dollars was offset against the growth of Chinese exports to the Dollar zone. But there has been increasing reluctance to continue to add to dollar holdings, not only in China, but in the Asian countries generally.

   Unfortunately, Asian countries have long-term reservations about the economy of the European Union. From the Asian point of view, the European economy, indeed Europe generally, seems to be in long-term decline. European costs are high. With the exception of German machinery, much of European manufacturing is seen as uncompetitive. Britain is respected as a financial centre, but that only supports the value of Sterling when financial activity is rising. At present Asia expects an American and European slow down, which will affect the earnings of London as banking centre.

   The modern pattern of global trade is one of the transfer of wealth from North America and Europe to Asia, and particularly to the three largest Asian economies, China, India and Japan. That movement has created the surplus of reserves in the Asian countries, and a reduction of reserves in the West. The Euro may at present be preferred to the Dollar or Sterling, but Asia has little confidence in the underlying European economy and the high price of the Euro makes the European economy even less competitive.

   One cannot expect gold to take the place of the Dollar in Asian reserves; there are too many dollars already in existence, and too little gold. Yet the surplus that exists of the Western currencies makes gold a very attractive alternative, particularly as Asia has always had a preference for the precious metals. Gold has its niche.

   The supply position of gold is favorable to further rises in the Gold Price. Despite the rise in the price that has taken place already, there is no sign on the production side of the creation of excess supply, though of course, stocks are high relative to industrial and jewelry outtake. Because it acts as a reserve currency, gold stocks are always large.

   There is also a link between the price of oil and the price of gold. In the 1970s, during which the OPEC oil cartel raised the price of its oil exports dramatically, gold rose with oil and also along with the general increase in world inflation. For some years I have been forecasting an oil price of $100 a barrel – which has now been reached, if ever so briefly – and a Gold Price of $1,000 an ounce. It would only take another 10% for the second target to be reached.

   The oil price has traditionally been volatile. A short-term surplus could see a short-term fall in the oil price just as a war with Iran could force the price up to $150 or even $200 a barrel. However, the long term problem of oil supply, and the insatiable growth of Asian demand, suggests that the long term price of oil will continue to rise.

   The same, in my view, is likely to be true of the price of gold. The great democracies of the West will find it difficult to make the sacrifices necessary to deal with the growing shortage of fundamental resources – most notably energy, including oil, gas and uranium. Our excessive levels of debt are likely at some point to lead to inflation in the cost of living, and that will wipe out the real value of debt.

   In these conditions, the underlying economic pressures are for a still higher Gold Price. In the last decade, the price of gold has been doubling every five or six years. My own guess would be that gold will hit $2,000 an ounce in the early 2020s, but some analysts think that will happen much earlier.