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Upside for Gold

28 years ago, in Jan 1980, gold hit a record price to US$850 an ounce. At that point of time, oil prices were shooting up, driven by instability in the Middle East, and the dollar, amid fears of a US recession, was falling dramatically.

In year 2008, the current situation is identical to what had happened in 1980. This time, the assassination of Benazir Bhutto in Pakistan, has pushed gold to a new high above $860 an ounce in Jan 2008. Once again, oil prices and fears about the US economy and the direction of the dollar are supporting the move.

The similarities end there, however. In 1980, after a surge from US$400 to US$850 in just five weeks, bullion prices collapsed to trade as low as US$300 a year later. But it is believed that the fundamental changes in the gold market have taken hold that suggest higher prices might last a lot longer.

2008-01-14_Gold_UpsideThis time, the price surge has been slow and fairly constant since a low in 1999 of about US$250 an ounce and support has come not only from gold's status as safe haven. Fundamentals factors identified by analysts include strong jewelery buying by the rising middle class in emerging countries such as India; investors' long-term interest in gold as a hedge against persistent dollar weakness; and falling output in South Africa, the world's largest gold producer.

All in all, if we believe that what has happened to crude oil will also take place in gold then in real terms, bullion would need to be well above US$2,000 to match the price achieved in 1980 as shown in the figure above.