Mid way through 2006, US 10-year bond yields began falling again, after rising from the lows of 2003. I believe this trend could continue into 2007, as the US economy continues to weaken from a housing induced slowdown. If this is the case, the Federal Reserve is also likely to lower the official cash rate.
What has gold got to do with all this? I believe gold will eventually discount the longer term inflationary pressures that lower interest rates will bring about. So if interest rates around the globe do head lower in 2007, in my opinion gold will eventually head much higher as investors seek the safety of 'hard' assets. And the 'hardest' asset is gold.
The prospect of generating sustainable demand by lowering interest rates, in an already indebted global economy, is low. I believe lower US interest rates and weaker economic growth will do major damage to the US dollar this year, thus benefiting its old competitor, gold.
Combine this outlook with a deteriorating picture in the Middle East and we have a recipe for the gold price to hit the US$1000 level by the end of this year.
This forecast may seem unlikely, given gold's performance in the last few weeks of 2006. However, viewed from a longer term context, gold's price action has been constructive. Following the correction from the 2006 highs, gold has been forming a solid base, which is a bullish sign. As a general rule, the bigger the basing pattern, the more powerful the next upward advance.
While gold may continue to move within the recent trading range, I believe the next upward move is inevitable. In summary, I see a slowing US economy in 2007 applying downward pressure on global interest rates. In turn, I believe gold will discount the increased liquidity and paper dollar creation that lower rates will bring, and move substantially higher. The rise is unlikely to be smooth or easy to endure, but I anticipate that it will certainly be rewarding.