Why gold could hit $1,000 an ounce

An analysis by ABN Amro commodities analyst Nick Moore pointed out that the gold price has traditionally moved in tandem with the oil price, although this relationship has broken down in the past five years.

'Over the past 20 years, gold has averaged $359 an ounce and oil has been $23.70 a barrel. Using monthly data, that equates to one ounce of gold buying 17 barrels of oil.'

This leads more Moore to say that on today's oil price, this would equate to a gold price of $1,115 an ounce. At first glance this looks ridiculous and yet this is rise would only be in line with what some other metals have achieved recently.

The price of copper is now 185% above its low point achieved in October 2001, while the nickel price is up 270% in the same period.

There has also been a recent report by authoritative British gold analyst GFMS suggesting that the metal is in short supply. Its annual gold survey reckons gold will reach $480 by the end of this year and surpass $500 in the first half of 2006.

GFMS estimates that demand for gold from Indian jewellery fabricators is up by almost 50% to 500 tonnes last year. It argues that fundamental forces of supply and demand are overtaking investor influences in the gold market with mine production down by 5% to 2464 tonnes, with sharp falls in Indonesia, South Africa and Australia.

Inflation hedge

Now if gold has become undervalued in relation to other commodities, is increasingly in short supply, and investors start to buy as a hedge against rising inflation and high oil prices - a traditional role of gold is as a haven for investors in times of financial uncertainty - then we surely have a scenario where gold is 'dirt cheap' as one bullion dealer recently claimed.

Last week gold prices went above $460 an ounce for the first time in 17-years and many currency analysts believe this is the start of a bull charge for gold. Any further rise in the price of oil, or any macro-economic indication of further inflation, is sure to boost the gold price.

Likewise, if stock markets were to undergo a correction then gold would be a likely safe haven for capital particularly if interest rates fell, putting the US dollar under pressure. In this environment it is perhaps unsurprising that many investors are diversifying into gold at this time, and such buying will also have a self-fulfilling impact on gold prices.