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.