New York - (
- Gold should reach an average price of $1,675 an ounce by the
end of 2012, inflation should not be a problem for the U.S. and
Canada, but will be persistent in China, according to a leading
Martin Murenbeeld, chief economist for DundeeWealth Economics,
said his firm sees an average price of gold at $1,515 in 2011,
rising to the $1,675 level by the end of 2012. Dundee's
projections are based on a model that uses different scenarios.
In one scenario, he said, Dundee examines all the forces that
will be negative to gold.
"We take all the bad assumptions, exit strategies, everything
that we think pushes the price of gold lower," he said during an
interview with Kitco News on the sidelines of the 2011 Hard
Assets Conference in New York this week.
Then, Murenbeeld said, the firm examines a bullish scenario in
which everything goes right for gold. Probabilities are applied
to that scenario and a baseline established. "When we add all
that up, we come to a number of about $1,515 for the year. That
average will rise next year. The average is likely to be around
$1,675 on present calculations."
Silver is a much more difficult metal to stick in an economic
model, according to Murenbeeld, emphasizing that DundeeWealth has
in past years tried to develop a process similar to what they use
for gold. He said the problem is that a large component of silver
is purely industrial with not so much monetary demand.
"At the margins there is some monetary demand and that is what
has been exploding in the past few years," he said.
As a result, Murenbeeld said, "we don't have a good feeling
about where the price of silver would go. "
He said, essentially, silver is a very high beta gold. "You
literally have to have a steel stomach to be heavily invested in
silver," Murenbeeld said.
Murenbeeld isn't worried about inflation in the U.S. and
Canada but signalled China is the country in the limelight.
In the U.S., he said, there has not been strong enough growth in
the M1 and M2 monetary aggregates to cause inflation concern. The
monetary base, he said, has burgeoned but "with the express
purpose" of trying to push M1 and M2 higher.
M1 is the category of the money supply that includes all
physical money such as coins and currency; it also
includes demand deposits, which are checking accounts, and
Negotiable Order of Withdrawal (
) Accounts. Economists use this measurement when they are trying
to quantify the amount of money in circulation. The M1 is a very
liquid measure of the money supply, as it contains cash and
assets that can quickly be converted to currency.
M2 includes M1 in addition to all time-related deposits,
savings deposits, and non-institutional money-market funds. M2 is
a broader classification of money than M1. Economists
use this category when looking to quantify the amount of
money in circulation and trying to explain different economic
One problem, however, is that the multiplier between the
monetary base and M1 and M2 has collapsed and economists keep
tabs on that relationship. Murenbeeld said there are varied
reasons for the collapse, such as banks being unwilling to lend
and consumers not having the willingness to borrow.
He said when the U.S. Federal Reserve buys bonds it puts the
money into the banking system, and banks would normally lend it
out. During this economic recession, however, they have put the
money back into excess reserves.
"So you get a blow-up in the monetary base but you get no
corresponding blow-up in the M1 and M2," he said, emphasizing
that it is the worst thing that could happen. Famed University of
Chicago economist Milton Friedman made famous the concept that
money supply can't be allowed to collapse, Murenbeeld said.
"You can't allow M1 or M2 to turn negative for any period of
time because you are flirting with depression," he said.
Murenbeeld said he agrees with what Fed Chairman Ben Bernanke
is doing with U.S. monetary policy, which he said is quite
different from what China is doing.
"China has massive growth in M1 and M2, much higher than what
the economy would normally absorb, which I am inclined to believe
is higher than stated," Murenbeeld said. "But China has a serious
inflation problem that is purely monetary driven. The U.S. does
not have that kind of problem. It may at some point but it
doesn't have it now."
Murenbeeld is bullish on both equities and gold, which seems
at odds since they can represent two different investing view
points, but he doesn't believe it's an unusual stance. The
situation depends on liquidity, he said. If there is enough
liquidity in the system-money supply that is either being printed
or otherwise being generated by central banks, "then the
liquidity goes to seek a home and one of the homes would be
For example, he said, when the Fed buys Treasury bonds, it
pushes the bond price up and yield down. That causes investors to
go to other assets---some to equities and some to gold, he
Despite the current pullbacks in commodities, Murenbeeld said
he thinks a base will eventually be built. He said last week's
pullback was interesting in that explanations of it ranged from
bin Laden's death to the end of the second round of quantitative
easing, to margin increases in silver. His preferred explanation
is the margin rise. Silver had gone parabolic and the higher
margins had to be put into effect to protect the system. "That
was the kind of correction, in my point of view, that was waiting
to happen," he said.
We'll go up again, and at some point, we will have another
correction," Murenbeeld said, "because there are some fundamental
things that will bias investors towards gold."
Some professional money managers are starting to treat
commodities as a tradable asset class, which bothers some
traditional investors as each commodity has different supply and
demand fundamentals. Murenbeeld said to look at commodities this
way, one has to start with the hypothesis that supply is
"If I wanted to buy gold for my portfolio and store it
somewhere, then I am directly affecting the price of gold because
there is no increase in supply to meet my demand," he said. "In
that case if enough investors come in at the same time to hold
commodities, then presumably the price will rise if supply can`'
meet that. And to some degree that has been happening."
But he said that may not be the whole story. DundeeWealth, he
said, runs a model on oil and it showed that during the recent
unrest in the Middle East and North Africa there was probably
about a $15 per barrel premium in the price.
"That might be what you call speculative investment," he said.
But he said it is a different situation when one approaches asset
class as a fundamental investment and add commodities to achieve
a certain rate of return or Sharpe ratio.
Money managers can do that now, he said, because commodities
have become securitized. "So I can access commodities through the
paper market-and for a portfolio manager that is very important,"
he said. "That is what happened with real estate." He said real
estate prices were not a part of a typical money manager's
portfolio. "As it became securitized, you could slice and dice
it, put it in your portfolio and have it serve its purpose,"
By Debbie Carlson of Kitco News
Terry Wooten contributed to the story