Further Upside Remains For Gold

This story features SOUTHERN GOLD LIMITED, and other companies. For more info SHARE ANALYSIS: SAU

By Chris Shaw

After rallying to record highs late last year gold has carried on the positive momentum into 2008 and raced through US$900 per ounce, Natixis Commodity Markets suggesting the rally was driven by investment demand as wealth preservation became an objective while global financial markets corrected.

In the group’s view this positive momentum may well continue for a few months, a view shared by Merrill Lynch as the broker notes along with investor demand there are a number of other supportive factors including US dollar weakness, record oil prices and ongoing geopolitical tensions.

The oil price is of some significance as the broker notes higher oil prices are inflationary and this is good for gold, while history shows there is a better than 80% correlation between the oil and gold prices.

This has resulted in Merrill Lynch lifting its forecasts for the gold price significantly in coming years, with its estimate for 2008 raised to (a year average of) US$925 per ounce from US$750 previously, in 2009 to US$1,000 per ounce from US$800 previously and in 2010 to US$1,100 per ounce from US$750.

The broker’s long-term price has also been increased to US$650 per ounce from US$600 previously as the longer-term supply/demand outlook continues to look more favourable.

On the demand side the broker notes jewellery demand remains good in emerging markets in particular even as prices have moved higher, though UBS suggests jewellery demand globally was relatively poor in the December quarter of last year.

The supply side of the equation looks supportive as well, the broker noting production in 2008 should be flat with respect to output in 2007, while output itself may come down as grades are falling at existing operations. UBS agrees and expects the supply side will remain under pressure, particularly as de-hedging should also continue to trend down.

Natixis also sees little to hurt prices from the supply side, the group pointing out there have been some disruptions to operations and costs continue to increase, while there is also scope in its view for official sales to trend lower over the course of 2008.

Natixis takes a slightly different view to Merrill Lynch though in seeing some risk to the price from the recent high level of investment buying, as there is always a chance the funds will reverse their long positions and this could prompt a sharp fall in the share price and at least should keep price volatility at relatively high levels.

Overall though the group expects gold will move through US$950 per ounce at some point this year, with a test of US$1,000 a possibility. The volatility means a smooth rise is unlikely, Natixis seeing scope for prices to trade down to US$800 per ounce as well in the coming year with an average in the high US$800 range.

UBS is more bearish and expects an average of US$825 per ounce for the year, the broker arguing using just jewellery demand as a base for the gold price it is currently around US$200 per ounce overvalued. In the broker’s view 2008 will prove to be the peak for prices in the current cycle.

RCR Equity Research takes the view the gold market’s fundamentals will remain strong through to 2010, so the group sees US$1,000 as very attainable this year given the metal’s position as a relatively safe haven in the current uncertain environment.

In terms of the impact on the gold producers in the Australian market the group suggests the higher price is creating opportunities in both new and existing regions, with takeover activity in the sector also likely to be stepped up.

The group also notes the price is encouraging exploration plays to look to new markets, as evidenced by Sino Gold ((SGX)) in China, Southern Gold ((SAU)) in Cambodia and Mundo Minerals ((MUN)) in Brazil.

Emerging producers it sees as offering leverage to the gold price include Monarch Gold ((MON)), Apex Minerals ((AXM)), Dioro Exploration ((DIO)), Norton Gold Fields ((NGF)), Navigator Resources ((NAV)), Silver Lake Resource ((SLR)), Regis Resources ((RRS)), Emperor Mines ((EMP)), Intrepid Mines ((IAU)) and Crescent Gold ((CRE)).

Others with exploration upside that also offer gold price leverage include Andean Resources ((AND)), Exeter Resources ((XRC)), Mutiny Gold ((MYG)) and YTC Resources ((YTC)).

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