Interest rate cuts 'could push gold to $1,500'

Gold prices could hit a high of $1,567 per ounce as low interest rates damage trading between miners and banks.

This is the warning of a new study from Edison Investment Research, which suggest that present market conditions closely resemble those of the 1970s.

According to the research, the normal trading mechanism between gold miners, bullion banks, central banks and other banks generally leaves a slight excess of supply for the precious metal.

However, policy actions from central banks aimed at tackling the economic downturn have seen lending rates slashed to all-time lows - the Bank of England currently lends to banks at 0.5 per cent, while the Federal Reserve in the US lends at effectively zero.

This means that real interest rates - lending rates minus inflation - have ’gone negative’ around the world.

It is this reverse that was identified by the Edison research as damaging trading, wiping out the excess gold supply it generates and therefore potentially leading to a supply squeeze in the metal.

The last time such a breakdown in the trading mechanisms between miners and banks occurred was in the 1970s, when prices were pushed to what was then an all-time high.

’We believe that the full consequences of the … easing of monetary policy have yet to be fully felt,’ the report stated.

’A special and often overlooked relationship exists between the price of gold and real US interest rates.’

Gold prices ended last week at $870.50.ADNFCR-2318-ID-19128524-ADNFCR