At odds with the fundamentals, the gold price continues to climb. Setting all-time nominal records after gaining around 30% so far this year, the EIU has upped its forecast for gold in 2010 and 2011. This is despite estimated growth in supply of 11% and a decline in demand of 14% this year. A story at the blog’s parent site explains the revised forecast: “High prices have proven self-reinforcing, encouraging investors to bet on further rises” [subscription required].
The Buttonwood columnist at The Economist argues that recent events around gold fulfil most of the preconditions for a bubble. But unlike the stock market, Buttonwood writes, gold’s lack of earnings or yield make it difficult to judge value relative to historical averages. (For what it’s worth, the current price is only around half of the metal’s inflation-adjusted high, US$2400, set in 1980.)
If some permanent loss of faith in the dollar is possible, gold will remain resilient as investors and central banks diversify their holdings. The spectre of stimulus-fuelled inflation in the US is also supportive of bullion. Mix in some speculative froth, and the gold price seems likely to remain elevated in the coming years. The EIU now anticipates an average gold price of US$1,186 per troy ounce in 2010, up from a previous forecast of US$1,044.