The Trading Floor

[Arctec]

Gold: a long term bull market in sight
By: Barry Sergeant
Posted: '16-JAN-07 13:00' GMT © Mineweb 1997-2006



JOHANNESBURG (Mineweb.com) --The Bank Credit Analyst (BCA) has identified four pillars cementing the case for a long-term bull market in gold bullion. Gold bugs will be relieved by the finding that the long-term uptrend in gold prices remains intact; the caveat is that investors should wait before buying.

BCA Research identifies as the first pillar global liquidity settings, which are likely to remain “plentiful because inflation will stay low”. Inflation rate profiles differ across the world, but the latterly feared crude oil price shock appears to have receded. In the world’s biggest economy, the US, the inflation profile could now even be on the path to returning to disinflation.

Core US consumer price inflation was static in November, reinforcing the likelihood that threats and worries over inflation are now on the backburner. The surge in inflation early in 2006 had completely lost momentum, not least on a slowing US economy. Retailing, which comprises around 50% of the US’s CPI basket, is now experiencing severe disinflation, as retailers slash prices to prop up demand.

The second pillar identified by BCA Research is simply that investor demand for gold will rise in response to higher gold prices, after an extended bear market. While this may sound counterintuitive, the profile of the dollar gold price since early in 2002, when the latest bull market set in, closely shadows the progression of the dollar gold price during the 1970s, the previous gold bull market. The latter developed into a very big bull market indeed, one that many investors refuse to forget.

The third pillar is identified as central bank transactions in gold bullion; this “could take time to re-emerge after the wave of liquidation in recent years”. Central banks, mindful of geopolitical risk and the persistent dollar bear market, have taken to increasing and diversifying foreign reserves. For a number of countries, gold is a natural choice as an additional or increased component of national foreign reserves.

The fourth pillar is seen as Chinese and Indian private sector gold demand; this should improve as the wealth and incomes of individuals in those countries continue to rise. Chinese and Indian private sector buyers have long been major private sector buyers of gold bullion.

A number of experts offer further factors in describing the possible forward profile of gold bullion prices. Stephen D. Walker, a director of global mining research at
RBC Capital Markets, argues that crude oil prices remain “an important catalyst for gold, likely reflecting geopolitical risk rather than an inflation concern. We believe oil will remain a key driver although any weakness in gold price would be offset by strong physical demand from India, the Middle East and Asia”.
As for gold equities, RBCCM points to current offerings of 30% to 50% upside to its target prices for various stocks. Among Tier I producers, RBCCM attaches “outperform” recommendations to Goldcorp, AngloGold Ashanti, Freeport; “sector perform” rankings to Harmony, Newcrest, Barrick, Kinross (pro forma) and Newmont, while Gold Fields is rated as “underperform”.
Among Tier II producers, Centerra is rated as “top pick”, while IAMGOLD and Lihir are ranked as “outperform”; “sector performance” is seen for Bema, Agnico-Eagle, Yamana, Randgold Resources, Western Areas; Meridian Gold is ranked as “underperform”.
Among Tier III gold diggers, “outperform” rankings go to Hecla, Jaguar, and Perseverance; “sector perform” recommendations attach to Eldorado, Alamos, High River Gold, while “underperform” rankings are accorded to Celtic, Oxus and Peter Hambro Mining.
Among emerging gold diggers, Anatolia is seen as top pick; “outperform” recommendations go to Axmin, Banro, European Goldfields, Gabriel, Greystar, Moto Gold; “sector performance” is seen for NovaGold, International Minerals, and Ballarat Goldfields, while Bendigo Mining is ranked “underperform”.

Then of course there is the value of the dollar. Sluggish US economic growth in the next few quarters is likely to give disinflation further traction, and bring the country’s key core inflation rates back into the comfort zone (2% or less) of the Federal Reserve, the US central bank. This would leave policymakers leeway to cut interest rates in 2007, and while this would stimulate economic activity in the US, it would also undermine the value of the dollar, traditionally a stimulus for higher dollar commodity prices.

The Federal Reserve raised its core interest rate to 5¼% on December 12, stating that while recent indicators had been mixed, “the economy seems likely to expand at a moderate pace on balance over coming quarters”.

According to guru investor Bill Gross, MD of Pimco, the world’s biggest bond fund, the Federal Reserve is likely to respond to stimuli “sometime within the next six months with a series of cuts intended to re-stimulate growth . . . “ PIMCO is looking for the core Federal Reserve interest rate to be at 4¼% by December 2007.

In conclusion, BCA Research states that in the near term, “gold prices are vulnerable to cyclical headwinds and could correct further”. As such, significant pullbacks should be viewed as buying opportunities.