Gold prices have room to reach $5,000: Analyst

BANGALORE: Gold prices could catapult to anywhere between $1,870 and $5,000 an ounce based on a theoretical analysis, an analyst at Capital Economics said on Friday.

Spot gold hit a record high of $1,594.16 on Thursday, as the worsening euro zone debt crisis and fears of US default powered the metal's longest winning streak in five years.

Analyst Julian Jessop said gold prices hold significant potential for further gains if the Dow Jones Industrial Average were to test its record low ratio of between 1 and 2 versus the metal, as during the Great Depression and the early 1980s.

"Even if the DJIA were to fall by 60 percent following some massive new shock, to around 5,000, applying a ratio of between 1 and 2 would imply a gold price of $2,500 to $5,000," Jessop said.

The DJIA is currently about 8 times above gold prices at 12,455 points.

Jessop added that gold may hit his 2012 target price of $2,000 sooner than estimated. "Our own long-standing forecast is that prices will climb to $2,000 by 2012. However, we would not be surprised to see prices reach this level sooner and then rise significantly further," Jessop wrote in a note to clients.

The lower end of the target price range is derived by comparing gold prices with that of Brent crude. Gold's price ratio to Brent, currently at 13.5, has maintained a historical average of 16, since 1970. This ratio has soared to as much as 25 to 30 at times, suggesting prices could climb over $2,125 an ounce.

Gold prices could rally if the Federal Reserve starts another round of quantitative easing, Jessop said.

Additional support for gold as a safe-haven investment could be derived as fears of the survival of the euro linger. "If people seriously thought that there was a good chance that the euro itself would not survive, the associated flight to the safety of gold could easily see prices surge well above $2,000," Jessop said.