Citigroup says long-term gold price could double or even triple
Citigroup suggests that inflation and the fabrication outlook favor
gold.
Author: Dorothy Kosich
30 June 2008
Citigroup forecasts that "gold is likely to regain $1,000/oz by end-08 and
to work higher through 2009-2010."
In their recent Gold Commodity Update, Citigroup metals analysts John H.
Hill and Graham Wark also predicted that "longer term, we believe that gold
is capable of doubling or tripling from current levels."
The Citi global metals forecasts have an upward bias, at $906/$950/1000
average in 2008/09/10.
The analysts said "secular and seasonal factors favor gold" during the
second half of this year. "We remain positive on gold, based on macro and
supply/demand factors. The forces that have propelled gold for 5 years are
firmly in place."
During the second quarter of this year, gold has averaged $896/oz, up 34%
from the same quarter of 2007 and down 3% from the first quarter of this
year. "Following a series of downside fundamental tests gold appears to have
found a floor, and quietly climbed back to $917/oz."
"Despite extensive hand-wringing, the ‘floor in the dollar' has inflicted
minimal damage," the analysts noted. "We believe the drivers of the gold
bull market remain intact, heading into a favorable period."
"We see gold as well-positioned heading into Autumn, when fabrication tends
to heighten the market," they added.
Nevertheless, Hill and Wark warned, "It will be important for
seasonal/volatility dampened fabrication demand to recover, before gold can
move higher." However, they added," Longer term, we would not be surprised
to see gold double from current levels as the global policy prescriptions
for the credit crunch remain powerfully and uniformly re-flationary."
Meanwhile, Citicorp suggested that slow de-hedging is unlikely to result in
a gold market surplus, although they said it remains a key question. "We
believe that the combination of wealth creation in China, petrodollars in
Russia/Mid-East, and ETF inflows is likely to absorb possible additional
‘supply' of 200-300 TPY," the analysts advised.
In the meantime, "real interest rates are still strongly negative,
inherently favoring hard assets and gold," Citigroup noted.
In their analysis Citigroup found that the principal Exchange Traded Funds
hold 954 tonnes of gold bullion valued at US$24 billion, down 4% from peaks
during the first quarter of this year. Total volume is equivalent to about
130 days of mine supply. The analysts noted that average daily gold ETF
trading value was about $900 million, "more than that of Newmont and Barrick
combined."
ETF holdings are up 5% or 39 tonnes from trough levels at the end of May
amid profit-taking after $1,000, according to Citigroup.
"Gold correlations are evolving," the analysts noted. "Adherent owners of
gold as portfolio insurance should be delighted in recent weeks as
increasingly negative is being established between gold and the S&P 500. A
strong positive correlation with oil has prevailed year-to-date. The
negative correlation with dollar remains a fixture."
Citigroup's analysis also revealed that "gold shares have stalled as
investors have flocked to physical bullion or FRF-rich bulk/base miners."
"Disappointingly, gold equities remain near levels seen when the gold was in
the low $700s," the analysts determined. "On the other hand, cash flow
should be strong with gold above $900/oz.
"The move in gold has been perhaps too sharp for the equities," the analysts
said. "During a financial crisis, safe haven demand favors the simplicity of
bullion."
Citigroup's" buy-rated" gold picks include Barrick, Peter Hambro, Lihir, and
Newmont. However, the analysts cautioned, the second quarter is "likely
muted due to flat gold amid energy/input escalation."
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