Gold Breaks from Traditional Trading Versus Oil and USD, Looks Strong

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Includes: ANV, AUQ, AUY, GDX, GG, GLD, IAG, OIL, SLV, UDN, USO, UUP, WPM
by: FP Trading Desk

Safe haven demand and a lack of investment alternatives continues to help gold break from its traditional trading relationships, rising despite a strong U.S. dollar and weak crude oil prices. In fact, analysts at Genuity Capital noted that gold is more than $200 per ounce above its normal value relative to the greenback.

Meanwhile, sustained investor interest in gold throughout 2008 helped push dollar demand for bullion to $102-billion, a 29% annual increase, according to World Gold Council’s Gold Demand Trends. The organization also said identifiable investment demand for gold, which incorporates exchange traded funds (ETFs), bars and coins, rose 64% last year. This is equivalent to an additional inflow of $15-billion.

Genuity also pointed out that the opportunity cost of holding bullion has diminished, with treasury yields at record lows and demand fundamentals deteriorating in the broader commodity and equity markets.

Concerns about the stability of the global banking system and credit rating of the U.S. Treasury has been a major driver of physical demand for gold. Until clear evidence of stabilization in the global financial system emerges, analysts at Genuity expect this trend to continue.

“If the U.S. dollar weakening resumes in the medium term, as we believe it shall, and oil prices improve, gold should continue to prosper,” they said in a research note. As a result, Genuity continue to recommend gold over base metals in the near term.

Aram Shishmanian, CEO of World Gold Council, said:

The economic downturn and uncertainty in the global markets, that has affected us all, is unlikely to abate in the short term. Consequently, I anticipate that gold, as a unique asset class, will continue to play a vital role in providing stability to both household and professional investors around the world.

North American gold equities have risen more than twice as much as gold itself in the past month, showing stronger than typical leverage. Silver has also begun to outperform.

Genuity highlighted Silver Wheaton Corp. (SLW) was a name that provides leverage to the metal and has the potential for a re-rating.

The firm’s top gold picks in the intermediate space are Allied Nevada Gold Corp. (NYSEMKT:ANV), IAMGOLD Corp. (NYSE:IAG) and Northgate Minerals Corp. (NXG). It also favours seniors Goldcorp Inc. (NYSE:GG) and Yamana Gold Inc. (NYSE:AUY). The firm also raised its target prices for gold stocks by an average of 28% to reflect higher price assumptions for the metal.

Genuity said:

While our target multiples are now mainly near the top of the typical valuation range (1.0x to 1.7x), we believe that continuing positive momentum in the gold price should support further outperformance from the gold equities.

With the arrival of fourth quarter and year-end earnings season, one area of reporting that will see additional focus is the updates on gold reserves.

RBC Capital Markets expects gold producers to increase the gold price assumption used to calculate reserves from the previous range of $550-$575 per ounce to $675-$725. This will better match the three-year historical gold price as suggested for use by the SEC.

“With this increase, we expect most producers should be able to more than replace gold reserves mined during 2008, and show net gains from the end of 2007,” RBC analysts told clients.