RBC Capital Markets forecasts the gold price will continue to be volatile “offering an attractive buying opportunity for gold stocks on pullbacks into periods of weak demand in Q2/09 and early Q3/09.”

Meanwhile RBC is maintaining its average gold price forecasts of $850/oz for this year, $875/oz for 2010, and $900/oz long-term. Key catalysts for gold are expected to be seasonal demand trends; speculative and investment flows; emerging market flows and scrap gold sales; and U.S. dollar impact.

“As noted above, we expect significant volatility in the gold price, and we could see a trading range from $750/oz to $1,000/oz in 2009,’ RBC analysts said.

“Gold equities are also expected to be volatile, as they trend to trade off the spot price and not a projected average for a forecast period,” they suggest, adding that they believe the global Tier I and Tier II gold equities are pricing in a long-term gold price assumption of a range of $800/oz to $850/oz.

While RBC’s outlook on gold remains positive in the long term, the analysts advised that investors should exercise caution in the near term.  By mid-year the analysts expected a combination of reduced gold demand from emerging market countries; and “a seasonally quiet period for gold demand in June and July, which could result in gold testing the $750/oz level and gold stocks correctly significantly.”

“We would use this pullback as a buying opportunity, as we expect gold to return to the $1,000/oz level, and gold equities to rebound, with evidence of a sustained recovery in the global economy later in 2009 or early 2010.”

RBC warned that the risks of a gold price correction are increasing, and by mid-year “we could see significant corrections, similar to those experienced in May 2006 and October 2008.”

“While we remain positive on our long-term outlook for the yellow metal, we do see macroeconomic and fundamental pressures, which have the potential to negatively impact the gold price over the next three to four months.”

The outlook for gold-as far as RBC is concerned-includes a period slow demand in June and July may coincide with significant gold scrap sales from emerging market economies and will result in the gold price declining to the $750/oz level before a rebound late this year or early 2010 to the $1,000/ level as the global economy shows signs of a recovery.

“While Fed funds rate cuts to all-time lows and significant increases in the money supply have been positive catalysts for gold and have resulted in increase investor demand, we believe that the potential for scrap gold sales from the Indian Sub-Continent, the Middle East and Southeast Asia, which make up approximately 71% of the global gold demand, could overwhelm near-term demand trends.”

The analysts expects gold to be entering a seasonal period of weak demand this month in the wake of increased physical demand associated with year-end holiday restocking and the Chinese New Year. “We tend to see somewhat of a rebound in demand in April/May associated with the secondary wedding period.”

Nevertheless the analysts warned, with gold at all-time records in rupees and sharply declining Indian imports, “we would be concerned that weaker-than-expected demand, combined with a period of weak global demand, could be the catalyst for sharply lower gold prices into Q2/09 and Q3/09.”

While noting that the six largest gold ETFs have grown by 390 tonnes, “we believe this rate of growth is not sustainable for the balance of 2009.”

The analysts also advise that the demand for gold jewelry in many emerging market economies will continue to decline as domestic gold prices remain high. “In addition, we could see escalating scrap gold sales from EM countries with their economies under continued pressure.”

“The other change expected in 2009 is a sharp decline in the demand associated with producer de-hedging, which likely peaked in the 2007 to 2008 period as a number of major producers closed out gold hedge positions,” they added.

While RBC forecasts a slight decline in gold production this year, “we would not be surprised to see modest growth at these higher gold prices as gold companies continue to replace reserves and new mines began to contribute.”

The analysts favor large cap Tier I gold companies, which offers both upside returns on a relative basis and less risk to the downside in a weak gold price environment. RBC favors AngloGold Ashanti, Goldcorp, Kinross Gold, Newcrest Mining, and Yamana. Among the mid-caps, RBC favors IAMGOLD, Randgold Resources and Redback Mining, followed by small-caps Avoca Resources, DRDGOLD, Great Basin Gold and Jaguar Mining.