As gold price soars, production falls and central banks are less eager to sell

Bullion Outshines Record from 1980

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, January 3, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/03/cnbull...

Gold has soared through resistance to touch an all-time high of $861.20 an ounce in New York, surpassing the record last seen at the height of the inflation crisis in 1980.

Bulls seized the initiative as oil spiked briefly to $100 a barrel and the dollar buckled on bad manufacturing data in the US. The New Year surge -- setting the tone for the year -- may be viewed with some alarm by central banks, aware that gold often serves as a proxy for inflation fears.

Ross Norman, director of TheBullionDesk.com, said the world faces a new era of "peak gold" in which discoveries become rarer, leaving the market starved of the metal just as demand in China and emerging Asia begins to gather pace.

"Supply is declining despite a seven-year bull run," he said. "Production in South Africa is the lowest since the 1930s, and it is falling in Canada. As for the central banks, they are no longer quite so keen to part with their gold.

"New conduits such as ETFs have opened up, giving investors access to a market that used to be off-radar. It has led to a slow, glacial flow of big money into gold that is immune to profit taking. On January 9 China will start trading gold futures in Shanghai," he said.

Mr Norman, the top forecaster for the London Bullion Market Association over the past four years, said gold would reach $1,200 an ounce this year.

Veteran gold traders say the metal is enjoying a perfect storm of inflation fears, geo-strategic jitters over Pakistan and mounting concerns that the dollar could lose its role as anchor of the international currency system as Mid-East and Asian states break their dollar pegs.

While there is no likelihood of a return to the gold standard, the metal could find a new role as a hard currency to buttress the dollar and the euro if the Bretton Woods II systems disintegrates any further.

Russia has already said it aims to raise the gold share of its huge foreign reserves to 10 percent. There is widespread speculation that a number of central banks could soon start to accumulate gold, rather than rely too heavily on euro and sterling bonds as an alternative to the dollar.

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