Why gold could hit $5,000

Related topics: gold, inflation, emerging markets, metals and mining, Anthony Mirhaydari

With turmoil overseas and energy prices on the rise, investors are worried. They’re worried about geopolitical risk. They’re worried about a falling dollar. And they’re worried about inflation becoming entrenched as the Federal Reserve continues to administer its cheap-money medicine despite signs of inflation.

As a result, gold is on the move again. For much of last year, gold moved higher over worries about Europe’s debt crisis and a “double dip” recession in the United States. Prices fell into a funk in the fall, though.

Now, a new set of concerns has gripped the hearts and minds of investors. Fear has returned.

And the yellow metal has again set new highs this week, trading briefly above $1,500 an ounce.

So how high can it go?

Believe it or not, some analysts are calling for prices to move close to $5,000 — not immediately, but sooner than you may think.

The road to $5,000 gold

This is because, according to the folks at Standard Chartered Bank, gold is moving into a new “super-cycle” as a number of structural factors — including consumer demand from Asia and tepid growth in supply — combine to push prices higher. The team, led by Dan Smith, is looking for prices of $2,107 an ounce in 2014 as its base forecast.

The team’s members see the potential for much more. In their words, “statistical modeling suggests a possible ‘super-bull’ scenario of gold prices rallying up to $4,869 in nominal terms by 2020.”

It’s all about supply and demand.

The driver is increased wealth in Asia. The evidence shows a strong relationship between rising incomes in places like China and India and increased gold demand. Much of this is cultural, with gold holding a place of special religious reverence.

Data from the Shanghai Gold Exchange show that China’s gold imports reached 230 tons in the first 10 months of 2010. But in only the first two months of 2011, industry experts cited by Standard Chartered estimate that imports hit 220 tons. No doubt, Beijing’s somewhat weak-handed efforts to fight inflation are contributing to the rise, as people look to protect their burgeoning wealth from the ravages of rising prices.

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