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?