Gold prices hit 17-year highs in recent weeks, but the run may have just begun. The expected worsening of the already onerous U.S. government debt in the wake of hurricane Katrina puts an extra thick layer of icing on an already substantial cake as far as gold bugs are concerned.

“Gold has surged 43% over the past three years while the greenback has lost over 50% during the same period,” says John Ing, president of Maison Placements Canada Inc. in Toronto. “America’s problems will boost gold’s appeal as a haven in uncertain times.
Gold will continue to rise as investors dump U.S. assets in response to a falling dollar and continuing economic woes. The powerful locomotive that was once the U.S. has become the little train that can’t.”

Forces in gold’s favour come from various directions. They include: growing appetites in industrializing countries such as India and China; tight supply and a long lead time to increase production; a sagging U.S. dollar; and the enormous reconstruction costs in
Katrina’s wake.

Gold bottomed in April 2001 at US$256 an ounce, and had been stagnant this year — until recently. In mid-September it passed through a resistance level of US$458, which implies an upside technical target of US$510, according to Toronto-based technical analyst Don Vialoux. Fellow technical analyst David Chapman at Toronto-based Union
Securities Ltd. , says his reading of the technical tea leaves also shows gold is flying to loftier heights.

“Gold should hit US$500 within the next three to six months, and I expect it will happen at the sooner end of that range,” Chapman says. “Currencies are not worth the paper they’re printed on right now.”

Faced with the devastation of Katrina and the overextended credit conditions of consumers, the U.S. government will be unable to raise interest rates without further tipping the country’s precarious economic state in a negative direction. The greenback has already been weakening in the face of enormous government deficits, and the escalating costs of the war in Iraq. If the big buyers of U.S. bonds, particularly the
Chinese, lose their willingness to continue to finance the U.S. spending spree, the U.S. dollar is likely to depreciate further.

At the same time rising oil and commodity prices are leading to increased inflationary pressures. Inflation typically spurs hunger for gold because of its reputation as a store of value.

“It’s an old story and [one] that has happened in many countries — when debt spirals out of control it’s a matter of time before the currency collapses,” Chapman says.

Support for gold goes beyond the troubles in the U.S., however. The French ‘no’ vote on the European constitution last May created serious concerns for the Euro. Central banks around the world that might have been looking for an alternative to the U.S. dollar as a reserve currency are also leery of the Euro.

Meanwhile, physical demand for gold remains strong from various quarters. Demand from India typically picks up in the fall ahead of various religious festivals. There is also strong demand from jewellery manufacturers ahead of the Christmas season. Individual investors in China, who weren’t legally allowed to buy gold until 2003, are now buying gold directly from major banks through the Internet. The World Gold Council reports that in the year ended June 30, gold jewellery demand set a new record of US$38 billion. The second quarter was the highest on record for gold demand from India, up 47% from the comparable period a year earlier.

Many advisors are allocating a portion of their clients’ assets to the yellow metal as a hedge against potential trouble ahead in currencies and stock markets. A handful of mutual funds are available, including offerings from Dynamic Mutual Funds Inc., Sentry Select Capital Corp., Mackenzie Financial Services Inc., Sprott Asset Management Inc.
and the major banks. Exchange-traded funds based on the S&P/TSX gold index are also available.

“I’ve had some gold in client portfolios for some time, but it [has] accelerated since Hurricane Katrina,” says Bryan Snelson, a financial advisor with Raymond James Ltd. in Mississauga, Ont., who usually recommends a 5% portfolio weighting in gold-related assets.

“There is an inverse correlation between the U.S. dollar and gold, and people intuitively feel that a bit of gold makes sense,” he says. IE