Investor demand to push gold price higher in 2004 (page 1 of 3)

In addition, hedge unwinding by gold producers and limited gold production also underpinned gold prices.

In 2004, the price of gold is expected to continue rising, reaching levels comparable to those seen in the early 1980s during the last oil price shock. Factors that pushed gold prices higher in 2003 will again drive gold prices higher in 2004.

Most important for gold prices will be the strength of investor demand. Increasing global geopolitical instability, further dollar depreciation and growing risk of dollar devaluation will all strengthen investor demand for gold.

Demand from producer de-hedging will continue at last year's pace. Gold supply is expected to remain nearly stable. Gold production will increase slightly while central bank sales of gold are expected to decline. With investor demand expected to increase and supply to hold roughly stable, the price of gold should approach $500 per ounce by the end of 2004.

The key factors in creating investment demand for gold in 2003 were increasing global geopolitical instability and dollar depreciation. Last year global geopolitical risk was pushed to its highest level since the Korean War. The increasingly unilateralist foreign policy of the Bush administration was the primary factor driving global geopolitical risk higher.

Unilateralism has defined U.S. positions on issues ranging from trade to the global environment. However, the most profound and damaging expression of unilateralism has been through the pursuit of the war on terrorism. The invasion and occupation of Iraq explicitly contravened the United Nations and abrogated international law.

This severely damaged U.S. foreign relations with many countries, most notably France, Germany and Russia. In addition, the war on terrorism has also inflamed tensions between Israelis and Palestinians, and increased instability on the Korean peninsula.

Lastly, the war on terrorism has not subdued global terrorism. Terrorist strikes have become more frequent. The U.S. presidential election will be fundamental to pushing global geopolitical instability higher in 2004. Continued hardening of unilateralism, driven by electoral politics, will further strain U.S. foreign relations and intensify instability in the Middle East and the Korean peninsula.

Most importantly, the probability of a major terrorist strike in the U.S. and against U.S. interests abroad is increasing. As in 2003, the U.S.-centric nature of global geopolitical instability argues for further dollar depreciation this year.

Last year the strong dollar policy advocated by the U.S. Treasury since the mid-1990s was subtlely abandoned. It is generally assumed that dollar policy was changed in order to improve the competitiveness of U.S. exports, spurring growth of manufacturing jobs. It is more probable that dollar policy was changed, with heavy influence from the Federal Reserve, in order to counter building deflationary pressure in the U.S. economy.

According to the advance estimate of gross domestic product released by the U.S. Bureau of Economic Analysis on January 30, deflation of durable goods prices accelerated to -3.7 percent in 2003 from -2.9 percent in 2002. Durable goods purchases accounted for 20 percent of total U.S. gross domestic product in 2003. In addition, deflation remained stubborn in non-residential fixed investment prices. This investment accounted for a further nine percent of U.S. gross domestic product last year.

To counter deflationary pressure, the U.S.