Gold Equities Should Reward the Patient

While both gold and gold stocks have not experienced the same sort of declines base metals or oil producers have in the past few months, the price discrepancy between bullion and related equities persists. Gold is off 15% and the S&P/TSX Gold index has lost a third of its value in the past two months. Meanwhile, oil has declined more than 50%, zinc has fallen more than 30% and the S&P/TSX composite index has declined roughly 35%.

Scotia Capital analyst Trevor Turnbull remains bullish on gold, noting that dollar demand for the metal reached an all-time quarterly record of US$32 billion in the third quarter as investors flocked to safety. He also highlighted the identifiable investment demand gold offers, which includes ETFs, bars and coins.

Mine production, meanwhile, is expected to fall in 2009 as new projects are delayed and some older higher-cost operations will likely shut down as metal prices stay flat, Mr. Turnbull predicted. He also noted that central bank sales appear to be shrinking, while their purchases have started to rise.

As for the U.S. dollar, it has benefited since the credit crisis began as investors discard equities, commodities and other currencies in favour of cash and U.S. treasuries. When this trend reverses, it will be extremely positive for gold, the analyst told clients. However, he doesn’t see this happening for six to eight months.

“We believe that, as the credit and financial crisis continues to deepen, the U.S. dollar will eventually show its true colours and weaken against the world’s currencies,” Mr. Turnbull said.

He expects the lack of liquidity plaguing the markets to persist and push all asset classes lower or at least prevent them from staging bull runs. “In the interim gold should react better than most asset classes as investors will likely continue to look to it to hedge against the financial uncertainty and the credit crisis which appears to be growing,” the analyst said.

Scotia believes the price of gold will be in the range of US$700 to US$900 per ounce in 2009, with an average price of US$825. While gold should hold steady, it may not be able to reach new highs. It is in this period of uncertainty and low gold equity valuations, that investors should assemble a solid gold portfolio, Mr. Turnbull said.

His top pick is Barrick Gold Corp. (ABX) as a result of its large project pipeline, solid asset base and strong balance sheet. Yamana Gold Inc. (AUY) gets the nod for its near-term production growth, while Red Back Mining Inc. (RBIFF.PK) is favoured due to its organic growth and potential role as a consolidator in West Africa.

Comments

[bricki:]

With markets in panic and flight to safety on everyone's mind I expect that this is the high water mark for gold for a long long time.

2008 Nov 25 02:22 PM

[GMiki1:]

High water mark? I think not. It's called devaluation. Day by day, the dollar's value is being eroded by one bailout after the other. Once deleveraging is finished, the dollar drops and gold soars. So do the gold equities--all of them.

2008 Nov 25 03:21 PM

[oneoldude:]

GMiki,

Deleveraging by whom? Certainly not by the government. They are leveraging our country's future! Leveraging the future by printing money has always resuted in reflation (inflation).

So in principle I agree. The only real question is timing. I am probably getting in early but I am buying gold, silver, and commodities in general.

2008 Nov 25 09:04 PM

[relmor:]

Dont buy and hold the GLD long term. Do you really think theres gold in their warehouse? I suspect their is very little actual gold available for delivery from Barclays. There a bank that cant be trusted, like every bank on this planet. I wouldnt use banks to store my value until they remove my deposits from their liabilities side of their balance sheet. And stop making loans against my deposits. Then I may consider banks as anything more than legal criminals. Thats all banks are. They are designed to hand you toilet paper, and then charge you interest on the toilet paper.

2008 Nov 26 07:25 AM

[relmor:]

I wish people would realize that banks shouldnt exist. IF every american were responsible and lived within their means, banks would have no function other than to charge us a small monthly fee to store our gold their(now toilet paper).

2008 Nov 26 07:26 AM

[bricki:]

Banks shouldn't exist? Banks are clearly necessary for commerce. It just is not practical to make a physical payment in specie (be it gold based or not) for every financial transaction.

Once you have an account at a bank, the question is whether or not you should be paying the bank for the privilege or they should be paying you. If you don't accept the idea of fractional reserve you have to pay them. If you want some sort of return on the money you deposit along with free checking you are into fractional reserve banking.

Now we have an interesting question - why are there few or no banks that offer fee based banking services and 100% reserves?

Answer: because peeps want a return on their money. That is the only reason. There is no fundamental bar to a 100% reserve bank opening up and going into business. It's just that nobody would store their money there because instead of getting a return on that money they would have to pay a fee for that storage.

So full reserve banks are just another wingnut idea that has no practical value and will never happen because fractional reserve banks backed by a guarantee is much more economically attractive to people looking to store money.

On Nov 26 07:26 AM relmor wrote:

> I wish people would realize that banks shouldnt exist. IF every
> american were responsible and lived within their means, banks would
> have no function other than to charge us a small monthly fee to store
> our gold their(now toilet paper).

2008 Nov 26 01:24 PM

[Rhett:]

If the gold markets were not irrational, investment in gold would be a slam-dunk. Like everying else today, it's a toss-up.

2008 Nov 26 04:42 PM

[DollarTalk:]

I am very thankful for the blessings that I have in my life. Now, regarding the market, the power of optimism never ceases to amaze me. In fact, we are missing a very large component of our view on the market and the economy in larger view when we discount the role of perception. Most of this market volatility was brought on by increased uncertainty and the perception that our credit crisis and financial difficulties were beyond our ability to solve as a free market. This, of course, was exacerbated by the media and capitalized on by the media in order to accomplish the election of now President-elect Obama. Now, the media has their man and would do well to continue to promote positive, uplifting views on the future direction of the economy and the solutions and people proposed by President-elect Obama. Otherwise, they will find themselves in the company of the Republican party when the public develops a pessimistic or negative perception of the new President and his leadership team. That's all for now. More on my blog.

2008 Nov 27 01:51 AM

[JohnAl:]

The reason there are no 100% reserve demand deposit banks isn't because consumers don't want them, it's because the government guarantees fractional reserve demand deposits, making "free checking" profitable for banks. In turn, consumers will choose "free checking" instead of fee checking.

The question people need to ask about banking is why bankers aren't concerned about lending out checking account money, which depositors think of as their money, available on demand. Because if everybody went to the bank to remove their checking account money the banks would obviously fail. But they don't worry about failure because the government guarantees the deposits.

Many economists believe that it is this government intervention which is largely responsible for the 20th and now 21st century boom and bust cycle. The process goes like this.

Banks lend out a large portion of their demand deposit money, money they would never lend out in a free market system. This causes interest rates to be lower than they would be in a free market when this new government backed credit is added to true savings (the money that investors ARE willing to put on time deposit). This expansion of credit leads to credit bubbles, which recipients of the credit, like mortgage borrowers in the present crisis, use and thereby inflate the value of certain assets, like housing in the present crisis.

Eventually the credit bubble busts. In the present mortgage crisis the bust came when interest rates rose, and ARM rates based on interest rates went too high for the least qualified borrowers (those who wouldn't have received the loans in the first place but for the cheap credit caused at the start of the process.)

Of course, at the hub of all of the banking activity is the FED, acting like the Wizard of Oz, trying to engineer "just the right" rate of credit expansion. And that's the second big problem with the banking system - that it's essentially "centrally planned". And we know that central planning can and does fail. (Anybody remember the Soviet Union?)

Free market oriented people should question this whole process. I've come to believe that it's these government interventions that cause the boom and bust cycle. If we removed the government from the monetary system and allowed truly "free banking", we could avoid the pain of busts, because we wouldn't have false booms.

If you're interested in learning more about how government creates the boom and bust cycle start here:

mises.org/story/3128

2008 Nov 27 04:27 AM

[Natalie Le:]

Go buy Superfund gold funds. They're up 17-20% ONLY IN NOVEMBER. Their other funds are up 33-70% YTD.
The MD said gold is gonna double to $2000 coz of hyperinflation.
www.youtube.com/watch?...

2008 Dec 03 02:58 AM