By David Lew
Gold is on fire. Bullion traders, central banks and speculators are excited. India’s central bank, the Reserve Bank of India, that purchased 200 tonnes of gold for $1045 per ounce from the International Monetary Fund (IMF) has reaped a profit of more than $800 million in one month! Huge money that a central bank can make in just one month, indeed!

All these have catapulted gold to a record high of $1180 per ounce. And bullion traders and analysts are predicting that gold will zoom to $1200 by Friday. There is frenzy in the gold market. Though gold jewellery demand is falling in key yellow metal consuming countries like India, Dubai and China thanks to the high price of the precious metal, the metal continues to boom.

What is driving the gold market? Is the gold market on a bubble like the housing market in 2008? Or will bullion market turn out to be like the credit market that burst last year, leading to the collapse of dozens of banks across the United States. The demand from Central Banks of several countries including India, China, Russia, Sri Lanka etc to amass gold reserves, the steady decline of the US dollar, inflation fears and lots of speculative mania are spurring gold to this current historic boom.

So who will win on gold price forecast? Global commodities guru Jim Rogers who is insisting that gold will zoom to $2000 by 2010 or economist Nouriel Roubini who has dumped Rogers’ forecast as “utter nonsense?”

“Maybe, gold will touch $1,100 or so but $1,500 or $2,000 as predicted by Jim Rogers is nonsense,” Roubini told investors at the Inside Commodities Conference in New York. Rogers countered Roubini by saying that the latter does not about the way in which gold prices have been moving up historically. “I think gold is go over $2000 sometime in the bull market, but depending on what happens in the world it could go much, much higher,” Rogers said. “The old high, back in 1980 adjusted for inflation, would be over $2000 now, just to get back to the old high. So we’ll certainly get there some time in the next decade.”

Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television: "The price of gold will double to at least $2,000 an ounce in the next decade."

Another renowned gold analyst Jim Sinclair has predicted that the next target for gold is $1650 and then it will continue to rise past $2000?

Are all these predictions coming true? Looking at the daily surge in gold prices, it looks that gold is going to maintain the upward movement. Supporting the forecast of Jim Rogers and Jim Sinclair is a precious metals analysis that Merrill Lynch has just come out with.

The Merrill Lynch take on the yellow metals says gold is on a bull run, and it will continue for the next few months to touch $1500.

Here is what Merrill Lynch has to say on gold:

“Gold would move to $1500/oz in three steps over three years. The outburst of the credit crisis in August 2007 marked the start of the first stage, with gold rising from about $650/oz to about $950/oz. The second stage of gold price appreciation is primarily about USD weakness and lack of confidence in fiat currencies, and should drive gold above $1200/oz. The third and final stage will be driven, in our view, by a strong cyclical recovery in energy and commodity prices. Decomposing gold spot returns into factors, we find that USD depreciation and currency risk have been the key contributors to higher gold prices in the last eight months. Our analysis also suggests that gold prices have also been leading indicators of 5Y breakeven inflation rates and the USD yield curve slope (10Y-2Y) since April. Moreover, we find that the correlation of gold returns to EURUSD is a lot higher on the upside than on the downside.

Broad money in a number of key currencies expanded 7 to 10 times faster than gold supply in 2008. This trend is poised continue over the next 18 months. If EM CBs come to the conclusion that gold at the current prices is better value and offers lower political risk than government bonds denominated in EUR or USD, reserve diversification into gold will continue. We estimate that any given increase physical gold demand of 100t ($3.6bn) could push prices up by $45/oz. With EM FX reserves at nearly $6trn, it will not take much to send gold prices higher. The point of fiat currencies is to debase them as needed While some investors remain concerned that lax monetary policy could end up resulting in inflation sometime down the road, we would argue instead that the whole point of having a fiat currency is to be able to debase it when the economic conditions require it.

Of course, as the combination of monetary and fiscal policy measures help create an upswing in economic activity over the next two years, cyclical pressures will come back into the system. Because we expect gold to maintain its long-run relationship with other commodities, we see a third stage of gold price appreciation in the next 18 months where prices push above $1500/oz on the back of higher oil and commodity prices.

So looking at the manner in which gold is booming these days, it seems Jim Rogers is beating Nouriel Roubini in the gold price forecast game. These days, gold investors, central banks that are amassing gold reserves and even households that have purchased gold as investment must be praising the bold gold forecast by Jim Rogers.

What has Roubini to say about his “utter nonsense” talk on Rogers, as the former has been insisting that gold will move upto $1100 per ounce only. May be, as gold price touches $1200 per ounce this week, Roubini might pull out his outrageous utterance on Jim Rogers and make a better gold forecast!

David Lew is a bullion commentator with Commodity Online. He can be contacted at info@commodityonline.com

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