The oracle of Denver speaks, and he's usually right
Brendan Ryan
Guru Martin Murenbeeld delivered his annual forecast at last month's Denver Gold Forum, adding his authoritative voice to those predicting gold will top US$500/oz in the coming year.
What sets Murenbeeld apart from most commentators is his conservative and rigorous econometric approach, and the fact that he tends to get it right. For the past two years Murenbeeld's outlook, delivered at the gold mining industry's most important international conference, has been bang-on.
For 2005 he not only got it right, he predicted the average price within $2. The modest and softly spoken Murenbeeld - who stresses he is not a "gold bug" - says: "We were darn lucky. Hopefully we will do as well for 2006."
For the year ahead Murenbeeld is forecasting a probability-weighted average of $502/oz but adds that "gold could clearly go substantially higher in the event the dollar plunges and monetary reflation comes early. We are split between a mildly bullish and a more aggressively bullish projection. Our high price scenario has been given nearly as much weight as our baseline scenario."
Murenbeeld's high price g scenario allocates a 43% probability to gold averagin$565/oz in the year ahead :))compared with a 47% probability for $470. He tags the outlooks for the US dollar and the US economy as the key reasons.
"I am a dollar bear. The US current-account deficit by the second quarter of this year was in excess of 6% of GDP or nearly $800bn. If [the events of] 1985-1987 are a guide, then the dollar has at least another 15% -25% to fall.
"The US trade balance deficit had mushroomed to more than US$700bn by the end of July. The implication is that the dollar's exchange value is uncompetitive at its level of recent years."
Murenbeeld believes the Chinese renminbi is "grossly undervalued" and has to rise "lest protectionist forces in the US plunge the international economy into a dangerous trade war".
The recent upvaluation of the renminbi was a start but nowhere near enough. He believes the renminbi must recover much of the 34% by which it was devalued against the dollar in 1993.
Murenbeeld says that, up till now, the dollar has been supported by capital inflows from central banks - in particular in Asia. They buy dollars with their own currency to prevent the dollar from falling and their own currencies from rising. Private investors have also bought large amounts of dollars.
According to Murenbeeld: "This support for the dollar cannot continue indefinitely. Be patient. Something is going to break this and the dollar will inevitably have to decline further."
He says the crucial component of US debt is household debt, which is at record levels, as is the household debt service burden, despite low interest rates. The household savings rate is negative: he links this to soaring house prices, which are being turned by many into retirement savings vehicles.
"This is high risk in my opinion because it is dangerous in the event that house prices flatten out or decline."
His bottom-line assessment is that the debt situation is likely to result in monetary reflation, which means higher inflation, which is good for gold.
Murenbeeld stresses that consumer demand for physical gold is rising, despite the higher prices. "I am bullish on India and China. Per capita gold consumption will go up and that's what counts."
Murenbeeld also believes that Opec countries may use rising "petro dollar" income to buy more gold, which is a politically "neutral" currency.
"The last time Opec had significant surplus petro dollars, gold spiked to a record high in 1980. In 1973-1981 Opec added 270 t gold to its reserves. To bring its gold reserves up to 15%, Opec would have to buy 50m oz, costing $22,5bn. This would not be a hardship now Opec's foreign exchange reserves exceed $200bn."
Murenbeeld expects newly mined supply to fall while central bank sales - the biggest supply threat - are capped until September 2009 by the new Central Bank Agreement.
Financial mail
14 October 2005
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