Is there still upside in gold prices?

For the past two years gold has been a hedge against US dollar weakness with a 25% gain in price. However, in euro and yen terms gold has been a much more modestly performing asset, albeit a better one than falling stock markets.

This week Newmont Mining, the world's biggest gold mining company, forecast $450 per ounce within a few months. Hardly a very impartial source of advice, but not a cry without an echo among more sanguine observers such as AME Info columnist Dr. Marc Faber.

So why should gold prices head upwards? First, there is a trend towards a rise in all commodity prices in periods of low real interest rates as we have seen in the oil market, and also for metals and other commodities. Indeed, short-term US interest rates are probably negative at the moment, encouraging investors to put their money into something tangible.

As Dr. Henry Azzam points out in an article on oil prices this week, for US interest rates to become positive then rates would need to rise from 1.5% at present to 3.5%. He says this is unlikely given the condition of the US economy at present.

Another reason to be bullish on gold is that the imbalances of the US economy may result in a recession next year, accompanied by a financial crisis on Wall Street. Gold is the traditional safe haven under such circumstances.

You only have to look back to the 1970s to see another oil boom era in which gold prices rose to a peak of more than $800 by 1980 before collapsing and never recovering even until now.

Many commentators say that the financial system is far more stable and secure today than in the late 1970s but perhaps that overlooks the giant bets being placed in global capital markets by hedge funds and their proven capacity to cause major financial crises. We have only to recall the 1998 collapse of LTCM and the Asian economic crisis for an example of what hedge funds can do on the downside.

Thus the cautious investor might care to stock up on the most conservative of gold mining shares, or stuff a bag of gold coins under the mattress. Fortune may favour the bold but they loose their heads in a crisis.