Capital Economics raises this intriguing question today: Is gold heading for a replay of 1980?
Gold is an "obvious beneficiary" of the troubles in the Middle East and
North Africa, and there are many parellels with the highs of early 1980
after the second global price shock, when bullion hit $850 (U.S.) an
ounce, said chief international economist Julian Jessop in London.
Adjusted for inflation levels in the United States, that level of
January, 1980 is equivalent to about $2,400 today, which "suggests there
could still be plenty of upside," Mr. Jessop said in a research note.
The Soviet invasion of Afghanistan marked the biggest geopolitical risk
of January 1980, Mr. Jessop said, but noted that gold's peak at that
point was "sandwiched" between Iran's revolution and the start of the
war with Iraq. The hostage crisis in Iran was also in its infancy, and oil prices doubled in a year.
There are some distinctions between the two eras, notably that in 1980
gold surged amid sharply higher inflation, but also pumped up by a
decline in South African output, which then represented 70 per cent of
the world's production. And after that peak, gold fell into a 20-year
bear market.
"Nonetheless, in some other respects the conditions are now more
favourable for gold than they were in 1980," Mr. Jessop said, projecting
gold to surge to $1,600 an ounce by the end of this year and as high as
$2,000 in 2012. Not exactly a replay of 1980, but close.
"The global financial crisis has left serious doubts about the
creditworthiness of governments and financial institutions that
underwrite paper assets. At the very least, interest rates are likely to
remain very low in the advanced economies, thus minimizing the
opportunity cost of holding an asset like gold that does not pay any
income. We do not expect the major central banks to start to reverse
their quantitative easing any time soon either.
"Gold is also now firmly established as a mainstream financial assets,
exemplified in the fact that central banks were net buyers in 2010 for
the first time in 21 years. The continued rapid growth in emerging
economies, including China and India, means that fundamental demand for
gold is now stronger too."
Even if the troubles that have raged for weeks in the Middle East ease,
Mr. Jessop sees other "economic and financial shocks" that could boost
gold, including the fallout from a debt crisis in Japan, the threat of a
U.S.-China trade war, and uncertainty over the fate of the embattled
euro.
"And even if inflation is unlikely to take off, the havoc that deflation
would bring to heavily-indebted economists might prove to be just as
supportive for gold."
" USD- Durable goods and Initial jobless claims come out positive .."..
" the manufacturing sector continues to be a main driver of the economy " .....
First-time applications for jobless aid
dropped to 391,000 in the week ended Feb. 19, down from 413,000 a week
earlier. The four-week moving average of claims, which smooths out
volatility, dropped to 402,000, the lowest since mid-2008, before the
financial crisis took a turn for the worse. Claims have been
bouncing around 400,000 for several weeks, having retreated sharply from
peaks above 650,000 seen in early 2009. The number of Americans
remaining on the jobless rolls after the initial week of benefits
declined by 145,000 to 3.79 million. The total number of overall benefit
recipients, including those receiving assistance under an emergency
federal program, edged down in the latest week but remained around 9.2
million. The U.S. unemployment rate fell sharply in the last two
months to 9.0%, an encouraging sign that a long-dormant job market was
coming back to life. However, hiring has remained anemic, and analysts
worry about the impact of renewed spikes in oil prices on the ability of
U.S. firms to commit to new investments.
Orders for U.S. durable goods climbed
in January as demand for aircraft rebounded after plunging the
prior month.
Bookings for goods meant to last at least three years rose
2.7 percent after a 0.4 percent drop in December that was smaller
than previously estimated, figures from the Commerce Department
showed today in Washington. Orders excluding transportation
equipment unexpectedly dropped, reflecting a recurring pattern of
declines in capital goods in the first month of a quarter.
Manufacturers from Intel Corp. to Navistar International Corp. are forecasting rising demand as firms in the U.S. and
abroad ramp up investment. While factories remain a mainstay of
the recovery, limited improvement in the labor and housing
markets helps explain why the Federal Reserve is forging ahead
with a plan to bolster the economy.
“The manufacturing sector continues to be a main driver of
the economy,” said John Hermann, a senior fixed-income
strategist at State Street Global Markets LLC in Boston. “We see
a more moderate period of growth” for factories in coming
months, he said.
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