Dylan Lobo: why gold could revisit 1980 and burst $2,000

It is possible to draw parallels between today’s unrest in the Middle East and that of the 1980s which saw gold hit record highs.

The price surged to above $1,400 per oz this week as the crisis in Libya intensified. With the nation’s ruler Colonel Gaddafi vowing not to relinquish power, and growing fears of contagion across North Africa, it would seem the only way is up for the gold price in the foreseeable future.

Back in 1980 the gold price hit $850 ($2,400 in today’s terms when adjusted for CPI inflation) when there was political unrest in pockets of the Middle East.

These included the Soviet Union’s invasion of Afghanistan, which came hot on the heels of the Iranian revolution and was followed by a war between Iran and Iraq.

The chaos in Libya has seen the oil price rocket towards $120 a barrel and Nomura warns it could soar to $220 if Libya and Algeria halt oil production. If this were to materialise it would have an obvious major impact on inflation and send the gold price even higher. There is a clear parallel to draw with 1980 when an oil price shock was a major factor behind the rise in the gold price.

However, at this stage the chances oil moving above the $220 level seem pretty remote.

For Capital Economics, which turned bullish on gold at the end of last year, the major difference between 1980 and now is the inflation threat. Back then consumer price inflation (CPI) hit 15% in the US and 22% in the UK and Capital does not expect inflation to come close to this level this time around, with CPI peaking at 3% in the US this year and 5% in the UK.

Another major difference in 1980 was the relative concentration of gold production, which was reliant on South Africa for 70% of global production, with the likes of Australia, Peru and Uzbekistan becoming just as crucial to gold production and no single country accounting for more than 10% of global production.

Conditions could be more favourable this time around

However, in several other aspects the conditions for gold this time could be even more favourable as the global economic crawls back onto its feet following the credit crunch.

Income remains hard to find following the financial crisis and while interest rates are likely to rise at some point in the near future to combat inflation they are unlikely to rise significantly.