Experts Hopeful About Gold’s Prospects

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This story features LYNCH GROUP HOLDING LIMITED, and other companies.
For more info SHARE ANALYSIS: LGL

By Chris Shaw

Many investors may have been disappointed in the performance of the gold price in 2008 given the precious metal was unable to push through its early year high of US$1000 per ounce, even amidst a major financial crisis. As it was, gold ended up finishing the year below US$900 per ounce; practically unchanged over the year.

Barclays Capital points out gold was one of only a few commodities to finish last year at a (slightly) higher price than where it started the year. Moreover, gold’s average price of US$871 per ounce made 2008 the fifth year in a row of an annual average price increase.

Where to from here in the group’s view depends largely on whether or not investors continue to turn to gold. But at the same time there are other factors Barclays sees as supportive for the metal. For one, the group sees the oil price as recovering somewhat over the course of 2009 and this offers a potential boost. At the same time, Barclays sees inflationary pressures building from the stimulatory policies being introduced by governments around the world as they deal with the economic downturn. This too should be to the benefit of gold.

GSJB Were agrees, taking the view the recent de-leveraging by investors has resulted in support for the US dollar, which has been a negative for gold. While this may continue for a few months as the process plays itself out, the greenback should weaken eventually and gold would likely benefit from such a change in trend for the currency.

Deutsche Bank is similarly positive and it points out the collapse in real interest rates in recent months has offered some support for the gold price as investors have looked elsewhere for returns on their money. With the US dollar expected to decline as the demand for US Treasury securities as a safe haven investment fades (parallel to fading fears of a collapse of the global financial system), there should be scope for gold to gain in the group’s view.

As well, Barclays points out the physical balance for the gold market remains supportive, as supply is expected to fall further in coming years. While jewellery demand is under pressure from reduced purchasing power, this trend should also be offset by ongoing safe haven buying of the metal by investors.

In terms of actual price forecasts for the coming year, Deutsche Bank is among the more bullish, forecasting an average price of US$914 per ounce this year. Other estimates are relatively closely grouped, but at a lower level.  Barclays Capital is forecasting an average this year of US$840 per ounce, Danske Bank expects prices to average US$818 per ounce and GSJB Were is forecasting an average price of US$815 per ounce in 2009.  

To play the gold price outlook via the larger listed plays on the Australian market, Deutsche Bank favours Lihir Gold ((LGL)), rating the stock as a Buy given its price target of $3.60 represents significant upside from a current share price of around $2.60. In contrast, the broker has Newcrest ((NCM)) as a Hold given a current share price of around $30.50 is at a minor premium to its target price of $30.00. 

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