Oil boom fuels gold speculation (page 2 of 2)

As with oil, investment in the mining sector today will take a long time to bring more production online. It takes a long time to bring new mines onstream, and existing ones are gradually being depleted.

Jim Rogers, a one-time business partner of legendary speculator George Soros, predicted this month that gold prices could go as high as $1000 per ounce. Using history as a guide, he said that the shortest bull market for commodities in the past had a "duration of 15 years." Rogers said that the current bull run for gold was "not a bubble."

Those that already hold large amounts of gold bullion will understandably be pleased to see prices rise even further, and may be 'talking the market up.' A commodity tracker fund set up by Rogers in 1998 has now more than tripled in value.

Nevertheless, the largest source of demand for gold is for the production and consumption of jewelry. The primary markets for such 'investment jewelry' are in the Middle East and India. India's growing middle class and the Gulf's oil-rich consumers are not likely to change their habits anytime soon. Saudi Arabia imported record amounts of gold in 2005.

Rampant Overvaluation?

To a certain extent, the demand for gold, mostly by investment funds, is feeding on itself. Some analysts have argued that the price of gold is being inflated by a "sheer wall of investment money" being attracted to it.

The higher the price rises, the greater the number of investors there are who want to get a piece of the action - rather like the Gulf's stock markets in 2005. The Goldman Sachs Commodity Index is now at record levels, and has risen by 13 percent since the start of this year.

The current bull run on gold has led to the creation of various tracker funds that let anyone speculate on gold without needing to acquire a bank vault in order to safely store it. Such funds have enabled huge numbers of investors to trade in gold. UK-based metal market analysts Virtual Metals points out that gold-centric funds were nonexistent before 2002.

As has already been pointed out, gold has few industrial uses, and therefore at a time of limited global inflation should not necessarily be rising in tandem with copper and oil. It was estimated that in 2005 the electronics industry (the main industrial consumer of gold) accounted for only eight percent of total gold demand. In theory, a rapidly growing gold-recycling industry and steady supplies of the precious metal should see price stabilizing somewhat. But markets do not always act rationally.

In summary, it is not likely that commodity prices will significantly fall in the short term. This is because demand from rapidly growing developing economies is set to remain strong. Such economies will require large amounts of raw products, and will thus buy them even at arguably inflated prices.

In a fast-transforming global economic landscape, it is not really all that surprising that supplies of some raw materials are not keeping up with demand. Similarly, investors seeking short-term profits at a time when other asset classes are comparatively underperforming are bound to put more of their money into gold.