BMO Capital Markets Tuesday predicted that gold will be a strong performer for at least the next three years.
BMO Research forecasts gold to average US$925/oz in the second half of this year and in 2010 with spikes likely easily topping US$1,000/z next year. However, H1/09 is expected to be weaker with a trend around US$850/oz.
Global Commodity Strategist Bart Melek advised that gold appears to have run ahead of its main drivers: the U.S. dollar is strengthening and disflationary risks are growing in the short run. It is possible that gold will retrench below US$850/oz, before trending up toward US$1,000/oz later in the year.
Melek forecasts a choppy near-term outlook gradually turning buoyant in H2/09/
Anxiety stemming from fear surrounding the solvency of the banking system, the U.S. dollar and inflation, and record-setting equity market volatility has prompted investors to move aggressively into gold in recent weeks. BMO full-heartedly agrees that most of these factors are very bullish for gold for the next three years, but analysis reveals that the gold market has jumped the gun somewhat, he said.
Melek suggested that a gold price correction looks quite plausible, with gold averaging about US$850/oz in the first two quarters of 2009. Previous experience suggests that the price could have a down-spike below US$800/oz.
BMO expects gold to rally once there is evidence that fiscal and monetary policies are starting to work. This is projected to lift confidence in the banking sector and among consumers-lifting the money multiplier and igniting inflation risks.
‘Rising commodity prices should also start to plant additional seeds of future inflation expects, Melek advised. To the extent that gold reacts ahead of actual inflation, it is quite possible that the gold price may start firming up in the second half of 2009-gold has often led inflation by 12-18 months in the last 20 years.
Investors would be well advised to look for long-term yields to turn higher, he added. Once investors emerge from the current panic mode (which is driving capital into treasuries and the U.S. dollar) and once most of the central banks around the world are well past their cutting phase, we should see the greenback weakening, thus lifting gold to an expected US$925/oz in the second half of 2009.
THE ONCE AND FUTURE HEDGE; A TIME FOR GOLD
Melek noted that, during the credit meltdown and deepening recession, gold is proving to be a very good investment, standing nearly alone in its strength.
Gold seems to be supported on a broader basis as 2008 marks the eighth consecutive year since 2001 that the metal has closed higher, Melek observed, adding it has surged 250% since the price fell to a depressingly low $255.85/oz in February 2001.
Gold is supported by its traditional role as a hedge in times of political and economic uncertainty-viewed by anxious investors as a store of value and a safe-haven asset, he said. Gold is in an uptrend in virtually all currencies, decoupling from the U.S. dollar recently, and reaching new highs in terms of the rupee, the euro and others.
Melek added that gold is ideally suited for today's extremely risky environment. A surge in investor appetite for physical gold in the form of coins, bars and the record holdings of gold-based ETFs illustrate the metal's appeal as a safe-haven in troubled times.
Meanwhile, BMO suggests that rising middle class incomes in India, China and the rest of the developing world are expected to buoy consumption in gold.
Many emerging nations with growing incomes are the most likely candidates for increased holdings of physical gold assets, typically in the form of high karat jewellery. Furthermore, the use of jewellery as a status symbol increases with higher incomes among the middle class in these regions.
Melek also noted that the investor class considers gold and gold-backed assets to be both a commodity and ultimate money.
Currently, investors are afraid-they don't trust banks or the U.S. dollar and expect purchasing power to erode, he explained. As such they assign great value to safety and set up a very high price for gold-it's the marginal cost of safety. That cost goes up when the risks are high and drops when risks fall.
The risk to wealth is presently very high and will continue to be under threat as inflation emerges and the U.S. dollar's dominance is question. That it is why it is possible to have gold significantly above the marginal cost in uncertain times. BMO expects gold spikes above US$1,000/oz over the next several years. It is, after all, the ultimate money, Melek concluded.