Merrill Lynch Kisses Up to Gold, Predicts It Will Hit $1,500

I thought investment banks were supposed to hate gold, but on Tuesday we had the CIO of Merrill Lynch telling the world that the price of gold is going up and going up fast. They quote him as fearing that the price could reach $1,500 within the next 12-15 months as people seek a safe haven asset. He further states that gold is still affordable at current levels, especially considering declining production and supply levels.

Tuesday’s article seems like a bit of a repeat from an October 2008 MarketWatch article in which unnamed “analysts” at Merrill Lynch also predicted the price of gold would rise to $1,500, although they didn’t provide a time horizon. The original MarketWatch article stated:

Gold prices could hit $1,500 as global plans to rescue the financial industry are set to increase inflation pressures, according to analysts led by Francisco Blanch at Merrill Lynch. “The unintended consequence of the ongoing financial bailout will be a return of inflationary pressures to the commodity markets,” wrote the analysts in a note released Monday. The analysts didn’t say when gold would hit the price target. They also predicted oil prices will rise to $150 a barrel.

Fast forward to February 3rd, 2009 and we have Merrill Lynch kissing up to gold once again. Tuesday’s article appeared in Business 24/7, which touts itself as the first and only business publication in the UAE.

Gold prices may hit $1,500 an ounce in the next 12 to 15 months, Gary Dugan, the Chief Investment Officer (CIO) of Merrill Lynch, said yesterday. With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of “the most trusted currency”, Dugan said. “We have never seen such a rush to buy gold. It’s bringing in security and it’s still affordable.”

Merrill Lynch commodity price forecast authored by Dugan showed that gold prices can rise from the currently prevailing $913/oz to $1,100/oz in the first quarter of 2009 and to $1,150/oz in the second quarter. “While demand for gold has been rising production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems,” Dugan said.

Dugan said the greenback, which has been strengthening for the past few months, will decline in value by the middle of this year. “That’s when people will begin to realize that President Obama’s policies are not having the desired impact,” he said.

I am not sure if it is bullish or bearish to have Merrill Lynch shouting about gold’s coming ascent to $1,500. On one hand, it is affirming that even those that stand to lose from the rush to gold acknowledge that the price is going much higher. These guys are no gold bugs as they rely heavily on derivatives schemes and fiat money creation to fill their coffers. The concept of investors getting out of mainstream stocks and into gold bullion doesn’t exactly bode well for Merrill. But I guess they can just return for another bailout if need be.

On the other hand, the conspiratorial cynic in me wonders if they are intentionally trying to build mainstream confidence in gold just before they coordinate another short attack alongside central bankers dumping large amounts of gold into the market. If that sounds a bit crazy to you, spend some time reviewing the information here.

I went back and tracked the price of gold after the last announcement from Merrill about the prospect of $1,500 gold. It occurred on October 14th, 2008 and was followed by gold breaking down through support and falling over $100 in about 10 days. Gold then consolidated for a month in the $720-$760 range before moving higher towards the end of November and continuing to its current level above $900.

So will we see another sell-off in gold during the next few weeks or was it just coincidence that the price dropped so quickly after Merrill’s last bullish announcement?

With gold jewelry demand down by 70% during December in Abu Dhabi, will investment demand be able to make up for the shortfall?

With Senate GOP leaders signaling that they will not go along with Obama’s stimulus package, will this be bullish or bearish for precious metals?

If Merrill Lynch is right and gold hits $1,500 in the next 12-15 months, that would represent a gain of about 67%. If you are invested in gold mining stocks over that same time period and history suggests leverage of 3-4 times the gain of the underlying metal, you could be looking at more than tripling your portfolio by this time next Summer. Got gold?

Comments

[20smoney:]

gooooooooooooooooooooo...

Feb 04 03:32 PM

[Gold Barron:]

I hope gold goes to $1500, but I don't believe the Authors sources for one. And who cares what Merril Lynch thinks? Didn't they go bankrupt? They dont know what they are talking about.

Feb 04 04:25 PM

[John Polomny:]

While Merril Lynch's CIO is publicily touting gold the trading desk is selling it. I dont listen to sharpies from Wall Street for investment advice.

Feb 04 04:45 PM

[heartbone:]

With the establishment sharks touting gold, I expect it to take a hard nose dive sooner before later. Based on 1913 bullion valuations In 1913 $1 was 0.77 oz silver and $1 was 0.048 oz gold. Factoring in the CPI inflation figures 2008 Gold per troy ounce = $455.68, Silver per troy ounce = $28.44. I say watch out below goldbugs..... after they get all the suckers to buy into the hype. And the messed up thing is that the gold devaluation will act to keep silver undervalued.

Feb 04 05:32 PM

[Cesato:]

I don't think USD 900 is a good buy even is Gold was to go up. The level involves too much risk for the reward. It may easily drop eighty dollars from the actual level (USD 905), still continue bullish for the quarter and the reward will take a lot longer to be realized than the 1 or 2 days duration of the sell-off. USD 900 is to be on the sidelines. Selling short from the actual levels also involves an USD 80 risk in the spot price in probably 3 days. Options may be a better be for the rest of the week. The weekly close after the big news on Thursday and Friday will provide a better clue but sure with continuation in the direction of the weekly close. I'm bullish in Gold by the way, but the curretn level is a no go for me.

Feb 04 05:46 PM

[Conan the B...:]

ABX production is projected to go up by around 10% this year: this was from their CEO on Bloomberg within the last week.

South African production is back to normal.

Increases in production from current producers have been the norm for a few weeks now, NXG for example.

Feb 04 06:21 PM

[old guy:]

If you think BO is NOT going to cause massive inflation do not buy GOLD !!!

Feb 04 11:38 PM

[Conan the B...:]

I think BHO and company will help cause massive inflation. Inflation is already baked into the future.

When the population of the world interested in increased Living Standards more than doubles, it is impossible to get that Genie back into the bottle.

How quickly this occurs will depend a lot on how the "Initial Stimulus" is structured. This is the first Package, it is a continued attempt at easing the Credit Crisis. There will be another or possibly two.

Feb 05 01:36 AM

[mr freddo:]

I like GLD and GDX. The fact that Merrill Lynch is recommending gold is a bearish signal for sure in normal times but these guys have lost their ability to drive the herd over the cliff. As Gold Barron said, "Who cares what Merrill Lynch thinks." They went broke.

I think a rise in gold is inevitable given the fact that investors are looking for a safe haven and the economic bad news is far, far from over.

Feb 05 03:34 AM

[Russell Ups...:]

Demand for gold jewelry has little to do with the demand for gold as a hedge against a falling dollar. Jewelry is marked up 3-4 hundred percent compared to its actual value. Trillions of dollars will be required to bail out insolvent banks and the government doesn't have any so they will just print it. Billions of dollars in short term commercial paper come due this year with little chance of it being refinanced. Central banks around the world are printing currency that is backed by nothing but faith. I've never owned gold before but this time it's different. When the price of gold has risen above the S & P index in the past it has peaked from 2 to 4 times the index. There are a ton of call options on gold that expire the third week of February. There will be a number of trading opportunities, but longer term the flood of paper will bring inflation.

Feb 05 04:25 AM

[prairiedog555:]

If these thieving liars are for it it must be a scam. That is the best case for NOT getting into gold.

Feb 05 08:30 AM

[Ian R. Camp...:]

On a personal level, I continue to believe gold is a good safe haven investment, and that everyone who can afford to own some physical gold ought to whether its price goes to $1,500 or drops to $600. I do think the price is more likely to increase than decrease in the near term, and I agree with Mr. Hamlin there is leverage in gold mining company shares - so long as an investor picks the 'right ones'. In this regard, you can research the approximate 650 gold mining explorers and producers listed on the Toronto and Toronto Venture exchanges by visiting My Website.

At the same time in the current – and what I think is the prospective – economic environment I seriously question an Oil Price forecast – barring some serious oil supply disruption – that suggests Oil is going to $150 any time soon, as that would exacerbate the ongoing economic problems we all face.

Feb 05 12:53 PM

[stallrocket:]

Is this the same Merill Lynch that predicted $107 a barrel oil in October, then $95 a barrel oil in December and most recently predicted crude could go to $25 a barrel? Are they any better at gold than they are at crude? I doubt it.

Here's my prediction - gold will go as high as $1500 unless it doesn't. If it doesn't go as high $1500, then I will state here and now for the record that it will be lower than $1500. Where do I pick up my check?

By the way, your conspiratorial cynicism is not misplaced. Wouldn't we all love to have the market bully pulpit along with the ability to front run and provide the inventory for all the hungry "investors"?

I mean wouldn't it be impressive if Goldman Sachs had said "crude will hit $200, but will retreat to $40 within six months" so whatever you do don't buy dips all the way down or you'll lose at least triple what you made on the way up. Thanks from your good friends at Goldman Sachs."

Feb 05 02:15 PM

[nmelendez:]

Problem with stocks are the stupid spreads. They are ripping off the long term investors. The only reason gold has not gone sky rocket is because of the ETF's. These were not around in 1980's to hold down the gold demand so you bought a few packed miners. These ETF's are trade as options so as you buy they sell and keep prices fairly steady. Problem is their is now over 8 trillion on the sidelines in different denominations. China does not want the gold price to go up either since they are net buyers.
Personally i do not believe gold will go up due to demand, but due to lower dollar valuation.

Feb 05 10:03 PM

[Conan the B...:]

Russell: You are absolutely correct. "Demand for gold jewelry has little to do with the demand for gold as a hedge against the falling dollar."

But if the dollar is stable or rising and the demand for gold jewelry drops horrendously, the amount of gold supply increases dramatically.

I saw an article recently which estimated that 60% of Gold use came from the jewelry sector.

Will gold demand during a stable USD climate be able to absorb the increase in supply without a Hiccup first? I doubt it. IMHO

Feb 09 04:36 AM

[Chris-africa:]

Our mines are running out of Gold and platinum that can be mined at a cost affective way! Remember South Africa is still part Third World.Our Unions would not let the mines retrench thousands of miners if it was just about prices of metals.That`s why we have such interest in Zimbabwe.You all think the dollar can`t devalue! look at the Zimbabwe dollar!!!But lets say I`am wrong what would you really lose by buy Kruger Rands.Nothing !!you will sleep far better having them under your mattress than some U.S bank shares.But you decide.Sleep tight!

Feb 21 04:49 PM