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My guess on gold

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by Peter Switzer

I’m no expert on gold but I believe there are arguments that mean it could be less attractive this year. However, I can’t see it falling through the floor.

Overnight the Federal Reserve Chairman Ben Bernanke, speaking at a Small Business Forum in Washington, predicted the US economy would grow between three to four per cent this year but unemployment would not come down as quickly as people would like.

"It has looked better in the last few months — we think a three to four percent-type of growth number for 2011 seems reasonable," he said.

He made reference to the fact that deflation is no longer a concern but he’s not in the lookout for inflation camp.

Bernanke pointed to the slow improvement for the housing sector and prices and this will put a lid on rapid confidence rebounds, which should limit any inflation threat.

Lower Aussie

This comes as the likes of Goldman Sachs are predicting US economic growth of five per cent for the year and even if they’re wrong and Bernanke is closer to the money, then the Yanks should have a good growth year. This will help share prices and push up the greenback.

This should limit the rise of the Aussie dollar and many experts think our currency will fall to 92 US cents this year, which would help many businesses locally — especially tourism.

Predictions for 2011

By the way, the recent Fed's Beige Book, which looks at the economic health of 12 economic regions in the USA has come up in better than expected, which could be a promising sign for jobs in the USA over 2011.

Provided Europe doesn’t shock the world with a surprise debt drama over 2011, I suspect share prices head up, Yanks raise interest rates, the greenback gets stronger, inflation does not threaten apart from natural disaster spikes in commodity prices and therefore gold is less seen as a more reliable holding to cash and other competing assets.

Now we know the Yanks have increased their money supply but if GDP does increase by five per cent as some predict, it actually reduces the inflationary pressure from the money supply being pumped up.

Say your prayers

So there are two things to pray for this year: the US grows strongly and Europe handles their debt challenges professionally.

If these prayers are answered, then our shares and even the Aussie economy will look better than they do now. Maybe a third prayer could be that the Reserve Bank moderates its interest rate rises this year, but I’m not sure even if God has much influence over bankers!

Of course, if my prayers are not answered — then you better be long gold.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, January 14, 2011