RBC predicts ‘significant volatility' in gold prices

In a recent analysis, RBC Capital Markets warns gold price risks are increased, and "we could see significant corrections" by mid-year.

RENO, NV - 

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.

SUBSCRIBE to Mineweb.com's free daily newsletter now.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter

Related Links ARTILCES:  Gold stocks best investment as hard times will last longer and go deeper - Jay Taylor  Gold is entering a new era, thanks to a major rehabilitation as a global financial asset--CPM  Beware base metals optimism - stick to gold and silver for wealth protection  Which way will you make your play in gold? - Barry Allan  Gold to Hit New Highs in 2009 - CEO Survey  OTHER PAGES:  GOLD ANALYSIS GOLD NEWS USA

Back

 

responses to this article

Another false prediction from RBC Capital Markets While they predicted gold should come down to $750 in 2009, it never happened. $1000/ounce would be the highest in 2009 as they predicted, it's already over $1100/ounce in November of 2009. This is just another false prediction from RBC. These . .more highly paid analysts should all be fired. . .less by GoldGold on November 07 2009, 18:48 Find this comment inappropriate? Report it

Name
Subject
Comment