So just where is the gold price heading next?

This was the conclusion of the Fifth Dubai City of Gold Conference panel of experts at the end of the first day this week. Admittedly this broad brush view ignores several major disagreements among the panelists but it represents a fair balance of their opinion and it is rare to find such a consensus.

The note of caution was sounded by Harish Pawani from the Dubai Multi Commodities Centre who noted that 'any end to the bubble in emerging or global asset prices and gold will drop like a stone, as it did in March after the Chinese stock market fell by nine per cent.'

He also said the current '80 per cent long position' and the strength of investment funds in the gold market were 'a bit scary'. Ergo in a market sell-off, selling by funds would take gold prices down rapidly.

Bullish fundamentals

However, the longer term outlook for the gold price was very bullish, according to the City of Gold's expert panel. The weakening of the US dollar and US economic fundamentals like debt levels and the twin deficits support a higher gold price. The technical analysis of gold charts also supports a rising price.

Increasing monetary inflation worldwide is the key issue to watch, said private gold investor Paul van Eeden whose research establishes a correlation between the gold price and monetary inflation. Right now monetary inflation is double-digit around the world and the gold price should be at $900-1,000 on his calculations.

What such fundamentals surely mean is that any short-term weakness in the gold price due to disturbances in global asset markets would be followed by a sharp rally in the gold price. So what we have is a fundamentally strong gold market which is presently outshined by an enthusiasm for share ownership.

If the latter factor shifted into reverse then a powerful shift by investors into a very narrow gold market could produce a repeat of the kind of price spike for gold last seen in 1980 during a previous dollar crisis.

Exposure sensible

For investors adopting some exposure to gold looks sensible. The only question is whether to jump now or wait-and-see whether global or emerging markets first tumble, and produce a better entry price to buy the yellow metal.

Could gold disappoint and crash? Yes but only in the short term if investment funds stampede out in a more general financial crisis. But longer term the gold price would be supported by the only policy that the US authorities could rationally adopt in such circumstances, namely the further inflation of the money supply.

Perhaps it is therefore not surprising that whenever AME Info writes about gold that article is currently among then best-read for that month, and we publish between two to three thousand articles every month so that is quite a performance. It seems interest in gold as an investment class is rising along with the price.