Considering the federal government's stimulus package and bailout initiatives, pouring hundreds of billions of dollars into the economy and guaranteeing investments, loans, and deposits worth about $8 trillion, analysts at Blanchard and Company say these actions will create rampant inflation and dollar devaluation that will drive gold to $1,500 this year, and higher over the long-term.
Confronted with a collapsing economy and a dysfunctional financial system, the Fed has vastly expanded its balance sheet, essentially creating money out of thin air to fund a variety of new programs, says Donald W. Doyle, Jr., Chairman and CEO of Blanchard and Company.
Think about it, Doyle says. If you add up just the funds that have already been committed to the current U.S. Bailout, you get a figure that is larger in today's dollars than the cost of the Marshall Plan, the Louisiana Purchase, the New Deal, the Korean War, Vietnam, and the Savings and Loan crisis combined.
Doyle says he believes that the most accurate forecast for future gold prices can be derived by scrutinizing investor activity, and investors of all varieties are buying gold bars and coins in record amounts, continuing to shun risky assets for the relative safety of bullion because of fears about the health of the global financial system.
The fact that major investment banks like Morgan Stanley are forecasting inflation, and even admitting the possibility of hyperinflation in the years to come, suggests that investors will continue to increase their safe haven buying of gold, Doyle says.
For example, he points to bullion coin demand in 2008, which reached its highest level in 21 years, while Barclays Capital in London reports that they have already had more inquiries about investing in gold than during the whole of 2008. Other media reports have stated that the demand for gold and investment gold bars so far during 2009 is perhaps the strongest that dealers have ever seen, with growing institutional demand as well as demand from retail investors.
But there's more to the gold story, Doyle says.
Other key fundamentals are also pointing to a sharply higher gold price - at the same time that gold demand is rising, global gold production is falling. With most of the major known deposits mined, gold producers are increasingly moving into remote and risky regions in order to keep up with demand. With few major gold projects coming on stream, Doyle says increasingly tight supplies of the precious metal will play a bigger role in driving prices higher in years to come.
With decreased supply and increased demand, Blanchard and Company believes investors expecting years of inflation and global economic instability will continue pouring money into gold and securities backed by gold bullion, and the price will continue to rise, Doyle says. Expect a four-digit floor in the price of gold, with new record highs this year.