Gold Breaks $1300 as London Bullion Market Meets

Investment “Set to Drive” Price

Spot Gold Prices broke above $1300 an ounce early in London trade on Monday, pulling silver to new 30-year highs above $21.60 as world stock markets crept higher.

US crude oil contracts held north of $76 per barrel while the US Dollar recovered from new 5-month lows to the Euro, hit overnight in Asian trade.

Major economy government bonds rose, pushing interest rates down across the board and nudging 10-year UK gilt yields back below 3.00%.

“The conditions for the kind of sharp fall in Gold Prices that followed the 1970s’ bull market are entirely absent today,” said investment author and pension-fund manager Shayne McGuire this morning at the London Bullion Market Association’s annual conference.

After gaining 1000% in the previous 10 year, he said, gold only fell against a backdrop of “sky high interest rates, low equity valuations and – most importantly – low debt-to-GDP ratios in the developed world.”

Held this year in Berlin – and again sold out, as in Edinburgh 2009 – the LBMA conference brings together 450 bullion-market professionals representing industry players from miners to refineries, assayers, bullion banks, vault operators, investors and analysts.

Chief executive Stewart Murray opened the two-day meeting by reminding last year’s delegates of their average Gold Price forecast for today’s event, “a bullish” but overly cautious $1181 per ounce.

By Sept. 2011, according to the attendees’ average forecast today, the Gold Price will reach $1406 per ounce – “marginally less bullish than last year,” as Dr.Murray noted.

Two issues dominate this year’s presentations – regulation of London’s “over the counter” physical bullion market, which the Association is working to “get ahead” by formalizing its forward-market data as chairman Kevin Crisp noted, plus the gathering pace of institutional Gold Investment.

“The financial crisis has created a seismic shift in Gold Investment,” said Graham Birch, former manager of the $3 billion Blackrock Gold & General fund, and now a non-executive director of Petropavlovsk.

“Institutional investors now worry about return of, rather than return on, their money,” said Birch, as well as expecting lower rates of return, suffering very poor interest rates on cash, acknowledging counterparty risk as a major concern, and needing to diversify across asset classes.

“Gold Price movements will continue to be dominated by investors,” Birch went on, noting that the last year of the Central Gold Bank Agreement – which expired Sunday, with an agreed ceiling for 400 tonnes of gold sales – saw Europe’s major holders unload only 6.2 tonnes of their Gold Bullion, a drop of 92% from the previous year.

“Gold is the ultimate financial insurance,” said Teachers Retirement System of Texas manager Shayne McGuire, “and pension funds are only just beginning to talk about this.”

Current pension fund allocations to gold stand around 0.3%, McGuire showed in his speech, with all physical Gold Investment now equal to perhaps 0.5% of the world’s total investable wealth.

That compares with 3% at the 1980 price peak, a level of 5% in 1968, and perhaps 20% or more prior to 1933.

“Investors should be positioning for ‘tail events’,” said former Bank for International Settlements and current OECD economic advisor William White in his keynote address to the LBMA conference.

Warning that government and central-bank policy responses to the financial crisis are both based on “uncertain” models – and “could lead to further bubbles” as they have since 1987’s October Crash in the stock market – White said he fears deflation ahead, with a clear possibility of a massive spike in inflation.

“Is there room for gold in investment portfolios in this kind of world? The answer, I think, is undoubtedly yes.”