By Charles Gibson, Edison Investment Research, 03 February 2010
The passage of gold through $1,000 (£873.73) per oz vindicates our view that gold is in the second phase of its bull run and that it has the potential to spike higher in the near term. This is especially true if, as economists say, the current crisis is 'the worst since the Second World War' and therefore by extension worse than the 1970s when gold experienced its most famous bull run.
In broad terms we observe that the crisis of the 1970s proceeded in two distinct phases. In the first, burgeoning inflation (caused by the first oil shock), combined with a global economy dominated by twin US deficits to suck financial markets into a debilitating debt-deflation spiral in 1973-74. The world's authorities then reacted to the crisis by adopting an excessively stimulative monetary policy to counteract the resulting recession and thereby created a runaway wage-price spiral and a second peak in inflation later in the decade.
We continue to believe in the economic parallels with the 1970s. If 2009 represents the trough in inflation in the current cycle, it is therefore likely that the peak of the second phase of inflation will be in 2012 and that the gold price will peak one year after that in 2013.
We continue to believe in the medium-term potential of gold to exceed $1,500/oz. However, given the deflationary forces currently being experienced by the world economy we note that there is short-term potential for a hiatus before it resumes its uptrend.
visible-status-Public story-url-brokerview_gold_02022010.xml
