Just How Precious Will Gold Get?

Demand is high, supply is scarce, and a weak greenback is hoisting its price

Gold is finally getting some respect. Four years ago, when it began a steady upward march, only the hardiest gold bug believed in the glittery metal. But now, after a 75% climb since early 2001, gold is topping $435 an ounce, a level not seen since 1988, and the naysayers have gone to ground. "We're in a secular bull market in commodities," says Frank E. Holmes, chief executive of U.S. Global Investors Inc. (GROW ), a mutual-fund company that's bullish on the metal. "Nobody believed oil could go to $50 a barrel. So why can't gold go to $500 an ounce?"

The fever is so intense that new competitors are vying to grab business from New York and London, traditional centers of the gold trade. Last month, the Chicago Board of Trade began offering standard 100-ounce gold futures contracts. Dubai plans to open a gold & commodity exchange next year.

Certainly, the stars seem aligned for gold. For one, the Bush Administration apparently doesn't mind a steady decline in the dollar to goose U.S. exports. Gold and the dollar traditionally move in opposite directions. The past few years have been no exception: Since early 2002, the greenback has fallen 25% against a basket of other currencies, vs. a 56% rise in gold.

In a market dominated by investors and central banks, an often-forgotten factor is demand by consumers and manufacturers. Just as with many other commodities, the rise of Asia is boosting gold prices as everyone from India's jewelry-bedecked brides to makers of computers and DVDs in China clamor for the metal.

Scarcity is driving prices higher still. Mining companies survived the doldrums after gold's plunge from nearly $900 in 1980 by pruning exploration and closing marginal mines. Even if miners step up investment, says Gregory C. Wilkins, CEO of Toronto's Barrick Gold Corp., it could be years before they dig out major new supplies.

Of course, gold's joy ride won't last indefinitely. Inflation still appears to be under control. Federal Reserve rate hikes in the months ahead could boost the dollar. And demand for gold might slip if global growth eases. Says Mark M. Zandi, chief economist for Economy.com Inc., a consulting firm in West Chester, Pa.: "The bottom line is that gold prices are tilted higher, but they're not going to take off." For now, the world's gold bugs are betting he's wrong.

By Joseph Weber in Chicago

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