Why Analysts Think Gold Will Rise Higher

Includes: DGL, GLD, IAU
by: FP Trading Desk

Central banks appear to be slowing the pace at which they sell gold reserves, which should leave the metal freer to respond to current market developments. At the same time, gold miners are spending billions to unwind the gold hedges they took out at much lower prices than the US$700 per pound level we’re seeing today.

But what explains the apparent disconnect between the spot price of gold and gold equities?

Bullion saw a previous cycle high of US$722 per ounce (London fix) in May 2006 and is quickly approaching this mark, Canaccord Adams analysts said in a recent note to clients. Meanwhile, the TSX Gold Index is still nearly 10% away from the 331 point level achieved at the same time.

Canaccord points to short-term liquidity concerns in the ABCP and related markets, which may be making investors less willing to take on risk.

“If this assumption is in the ballpark then we suggest investors rethink this approach as holding gold equities, in our view, is not a bad hedge at all against the risks within the broad market, and in particular, the risks associated with the potential for further declines in the U.S. dollar –at least over the next several months,” Canaccord said.

The firm also pointed to expectations for strong demand for physical gold with India’s wedding and festival seasons beginning, bearish sentiment for the U.S. dollar, central bank interest in gold, record gold ETF holdings, commodity inflation and gold’s position as a safe haven from both financial and geopolitical tensions.

Canaccord expects gold will test and break above the May 2006 high.

Meanwhile, Dundee Securities analyst Jean-Francois Gagnon thinks the recent rally for gold stock has more staying power than those that came earlier in the year. One reason is because gold has historically proven to outperform most commodities in times of liquidity and credit crunches.

Mr. Gagnon also points out that gold is oversold, particularly when compared to base metals.

He thinks “a catch-up phase seems imminent with investors favoring precious over base metals as the global economy slows.”