LONDON (Reuters) - Gold could once again surge above $1,000 an ounce as the dollar plummets and investors seek alternatives to stocks, bonds and bank deposits as well as protection from inflation.
The buzzword at the moment is deflation. But fund managers are convinced this will be short-lived and followed by a period of inflation that will erode the value of paper assets.
Spot gold hit a record $1,030.80 an ounce on March 17. It fell below $700 in late October, partly because investors sold their holdings to cover losses in equity and bond markets hit by the credit crisis. It is now around $830 an ounce.
The trigger for a break higher is likely to come from a much weaker dollar, making gold cheaper for holders of other currencies, as markets price in vast amounts of U.S. government borrowing to shore up the economy.
“The U.S. will have a debt crisis next year alongside a currency crisis. The dollar is on the verge of taking a complete dive,” said David Murrin, chief investment officer at Emergent Asset Management.
Murrin added the repatriation trade, in which U.S. investors bring their money home and which has lifted the dollar in recent months, was mostly done.
“Gold will rally because it’s a surrogate currency, I can see it reaching its highs within 16 months,” he said.
Since October the precious metal has been sustained by institutional and retail purchases of gold coins and bullion either physically or through exchange traded commodity funds.
The world’s largest gold-backed exchange traded fund, the SPDR Gold Trust now holds more than 765 tonnes of gold, not far from the record high above 770 tonnes hit in the middle of October.
“Gold is the ultimate security blanket,” said Frances Hudson, global thematic strategist at Standard Life Investments. “If you are expecting a raft of debt issuance then you are probably expecting a fall in their value.”
Opinion is divided about timing and the levels gold prices could reach. Much depends on how much more money governments and central banks pump into the economy to ease the credit crunch.
“The monetary expansion that took place in October and November was absolutely unprecedented,” said Markus Bachmann, fund manager at Craton Capital.
“You can’t go wrong by holding physical gold. You don’t need to be a gold bug or a grave dancer. If you don’t know what the world is going to look like in the future then buy gold.”
The U.S. budget deficit hit a record $455 billion (295 billion pounds) in the year ending September 30. That number, according to some fund managers, could more than double this fiscal year, given the $700 billion financial rescue bailout plan.
The U.S. Federal Reserve is expected later on Tuesday to cut benchmark interest rates by at least half a percentage point to 0.5 percent, its lowest in more than half a century.
“It would be prudent to have some exposure to gold given the fiscal and monetary stimuli taking place,” said Edward Hands, a portfolio manager at Commerzbank Corporates & Markets.
“The purpose of the stimulus is to reduce the debt burden. The easiest way to reduce debt is through inflation, achieved primarily through currency depreciation.”
Fund managers believe gold’s role as a store of value will be highlighted when the velocity of money circulating in the economy picks up, as that is often a precursor to significant inflationary pressures.
“Certainly over the course of three, four, five years, you could see the gold price double quite easily,” Hands said.
High-profile bank failures in the United States and Britain have also eroded confidence.
“Many are afraid of leaving their money in banks,” said Sandra Conway, managing director at ATS Bullion, which sells bullion and gold coins to institutions and the retail market.
“It’s difficult to quantify, but I would say our turnover over the last three months has certainly doubled compared to the previous three months,” she said.
“There are people buying gold from us, who have never bought gold before. It’s tangible, something they can tuck away.”
Editing by Sue Thomas