Frank Holmes expects gold price to double in 5 years

1 September 2010

With the start of the festive season, September is likely to be a good time for gold and things should continue to do well into 2011

Historically, September is a very good month for gold. On average, the price of the yellow metal rises around 2.5% from its August price.
But, according to Frank Holmes, it is not just during September that gold will do well, he is expecting the yellow metal to double in the next five years.
Speaking on the Mineweb.com Gold Weekly podcast, Holmes, said, that is more than a "15% compound rate of return and that's far better than what you're going to expect from the stock market as a whole. The same thing is much higher than what you're going to get in a five year bond - a five year bond is paying you less than 2% - so the net in that one is that gold is becoming more attractive as a diversifier."
It is not, however, just its role as a diversifier, where gold is being supported according to Holmes.
He believes that there are two types of buyers of gold: one, he terms the price takers, who are "basically a buyer of gold for jewellery," which he says is an emotional reason to buy gold.
The second group, he calls the price makers. These are people who are buying gold as an investment and are, he adds, growing rapidly.
"This is predominantly because gold is basically looked and perceived more and more as a safe haven investment. The US, Western Europe and Japan are close to buckling under the weight of their own sovereign debt issues and government budget deficits remain large and persistent and, as a result, the major paper currencies is low."
He adds, it is in the seven most populous countries in the world where you find the strongest emotional attachment to the metal, while it is in the G7 countries where you find much of the investment buying.
As we head into September, it is the emotional buyer that has traditionally come to the fore as Ramadan, Diwali, Christmas and then Chinese New Year all follow on from each other. But, in the second quarter it was the investment segment that pushed the price up and there have been some comments about a decline in jewellery buying this year as a result of the higher prices - see story: India's love affair with faux gold..
Holmes admits that the higher prices do play a role but says it is more important to look at the volatility of prices. And, Holmes believes that this year, that same demand trend will continue, adding, that while a spike in gold will slow buying, just as quickly, a significant correction in prices results in a strong uptick.
"This demand from emerging countries if it's a really stop and fall off a cliff it's going to be because of economic developments," he says, rather than because of the price on offer.
But, while, such economic factors are possible, Holmes believes that the current lay of the land points to a bettering of the price of gold going forward.
Firstly, he says, on the investment front, more and more investors (including the likes of pension funds) are becoming interested in gold as an asset class because of the massive debt levels reported by governments around the world and, more importantly, negative real interest rates.
"Whenever you have negative real interest rates... you're fighting deflation and gold has always been a wonderful asset class when either you get big deflation or big inflation," he says.
But he cautions, " don't buy gold to get rich overnight, it's a great diversifier in a well balanced portfolio and the magic is to rebalance every year, to maintain that weighting which you feel comfortable - some are 25% - we've always advocated you should have a minimum of 10%."

Author - Geoff Candy, Mineweb

SOURCE: Mineweb - Geoff Candy