The bull case for gold: dramatic rises ahead
At Altus Resource Capital, we remain positive on the outlook for gold and junior gold mining equities in 2010. Recent price rises in both have drawn investor attention and as one of the best-performing asset classes over the last 10 years, few will have missed gold’s chasing, and eventual breakout above, the $1,000/oz level, having traded at just $253/oz a decade ago.
In 2009 we witnessed a broad-based equity market rally. The S&P 500 has risen 67.1% since 6 March, when it hit a 12-year low of 666 and the DJIA is up 62.3% since 6 March when it hit a low of 6,469. Equity investors’ appetite has been whetted by expectation of positive earnings news and cash pumped in from fiscal expansion. Gold tends to correlate inversely with the market’s confidence in the fiat characteristics of paper money, but has also continued its rise, having averaged $968/oz in 2009, 11% up from 2008 ($872/oz) and 38.9% up from 2007 ($697/oz).
The post credit bubble market data is clearly inconclusive and market participants are attempting to forecast scenarios ranging from deflation or stagflation to hyper-inflation, and from prolonged recession to imminent and sustained economic recovery. Despite the opportunity cost of having zero yield and in the backdrop of a broad-based equity market rally, gold is in demand from central banks, institutions and retail investors as a safe haven ‘hard asset’ investment and natural hedge against potential money-supply induced inflation, corporate defaults, potential exchange controls and currency debasement.
Gold hit a high of $1,226.6 on 3 December, buoyed by news that India had purchased 200 tonnes of the IMF’s previously announced gold sales for $6.8 billion (equating to about 2.6% of India’s financial reserves). Other central bank buying includes Sri Lanka and Mauritius, while the Chinese are believed to be increasing their reserves. Longer term encouragement has come from Barrick Gold, the world’s largest gold producer, which raised over $5 billion in equity and debt to close out its gold hedge book.
Investors are also making moves into the gold sector, including John Paulson, who has built a 12% stake in the world’s third-largest producer, Anglogold Ashanti.
Notwithstanding short-term increases from the secondary scrap market, the physical gold market continues to experience supply-side pressures. Production is falling year-on-year and there has been a paucity of world-class discoveries in recent years. Average grades are also falling, which is affecting the economics for the major mining firms. They typically each need to replenish around five to eight million ounces a year. In turn, this is driving M&A activity into new geographic frontiers.
Recent deals include the proposed $1.4 billion takeover offer of Sino Gold, which has gold assets in China by Eldorado Gold, and the combined takeover by Anglogold Ashanti and Randgold of Moto Goldmines, which has assets in the Democratic Republic of Congo.
The latest official revision of UK economic output showed a smaller contraction than previously reported but still came in worse than commentators had been expecting.
UK gross domestic product fell by 0.2% in the three months to the end of September, less than the 0.3% published last month and the 0.4% original estimate.
The level of GDP is now 5.1% lower than in the same quarter a year ago and 6% below its peak in 2008 quarter one.
Recent business investment data and construction sector output for the third quarter had added to growing confidence that the UK shrank only 0.1%.
With Ireland now officially out of recession in the third quarter, the UK is the only G20 country that is still shrinking.
Another surprise piece of news in today's release was the shock rise in the household saving ratio which unexpectedly jumped to 8.6%.
Record numbers of people have been paying cash into investment trusts as they try and shore themselves up for an upcoming period of austerity.
citywire.co.uk
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