October 6, 2010 / 3:09 PM / 8 years ago

Gold highs to extend on U.S. econ, currency jitters

LONDON (Reuters) - Record high gold prices are set to extend their rally in the next five years, as the United States struggles out of recession and confidence in paper currencies wanes, James Turk, founder of bullion dealer GoldMoney, said.

Turk said the prospect of persistently low U.S. interest rates and an increasingly soft dollar were set to drive prices up from their current high near $1,350 an ounce.

The main threat to bullion is a reversal of the current trend toward currency devaluation and a broad switch to monetary tightening, Turk said, adding that this was unlikely near term with the United States in particular on a bumpy road to meaningful economic recovery.

“The difference between what the Federal government is spending and earning every month is not narrowing,” he said. “It has never been this big.

“Look at the dominoes - it started with Iceland, then we had Dubai, then Latvia, Greece. Now we’re starting to look at Japan, the UK. The last domino is going to be the United States.”

With weakness in the dollar likely to be mirrored by other major currencies, like the euro, pound and yen, investors will be forced to choose gold as a safe store of value, he said.

“With this renewed decline in the long-term downtrend for the dollar, there’s been a rush into metal, because there is no safe-haven currency any more,” he said.

“Back in the 1970s, when there were problems with the dollar, you could go to the Deutschemark or the Swiss franc. The Deutschemark doesn’t exist any more, the euro has its own problems, and the Swiss franc is being tied to the euro. The only safe-haven currency today is gold.”

Gold prices have rallied more than 20 percent in 2010 so far to previously unseen levels, fueled by concerns over the safety of paper currencies and the outlook for major global economies, after financial market shocks of the previous year.

HALFWAY POINT

Turk said he expects it to be several years before the U.S. economy recovers fully. “We’re only halfway through this bust, in terms of extent,” he said. “Timewise, I think we have another three to five years.”

Central banks in most key economies have moved to shore up growth by slashing interest rates to historic lows, cutting the opportunity cost of holding non-interest bearing gold.

“Currencies normally pay an interest rate to preserve your wealth... but in a zero interest rate environment, you’re not preserving your wealth, plus, you have a lot of risk of counterparty default,” said Turk.

A number of central banks, like the Bank of England, Bank of Japan and U.S. Federal Reserve, have also introduced extraordinary measures such as asset purchases to boost money supply, in a process known as quantitative easing. This has weakened their currencies.

Though gold is grabbing headlines at present, Turk says he is more bullish on silver prices. Silver has also hit 30-year highs in recent weeks, peaking on Wednesday at $23.06 an ounce, a level not see since 1980.

He said he sees the drop in the gold-silver ratio — the number of ounces of silver needed to buy and ounce of gold — extending its recent decline below 60 to levels not seen since the early 1980s, near 20.

“I’m more bullish on silver than I am on gold because I think the ratio will fall,” he said. “The problem with silver is that it is not for everyone, because of the volatility.”

“If owning gold is like having a 747, owning silver is like having an F-16.” he said. “There are some heart-stopping reversals in silver, and some people don’t want that.”

Reporting by Jan Harvey; editing by Keiron Henderson

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