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A week in gold: Predictions still point higher for 2013  Join our daily free Newsletter

MENAFN - ProactiveInvestors - Australia - 25/11/2012

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(MENAFN - ProactiveInvestors - Australia) Goldman Sachs repeated its view this week that the general outlook for gold is set fair for 2013.

The basis of its optimism is a belief that US interest rates will continue to be low; central banks will continue to buy the metal, and risk appetite among investors is muted so they will continue to look for havens.

The metal has returned a compound annual growth rate of around 18 % (vs copper at 15%) over the past 12 years, notes the analyst.

"US real rates are unlikely to increase in the next 12-18 months, in our view, which, when combined with QE3 and the generally low risk appetite of investors, is likely to result in gold continuing to outperform and we expect the gold price to top US1,900 per ounce within 12 months."

Research house Edison, meanhwhile, also updated its estimates for the gold price and aome up with some punchy valuations for the next few years.

Edison argues that dating back over fifty years indicate there is a statistical relationship between the gold price and US monetary base. This becomes particularly significant at times when the US monetary base is increasing, as it is now.

It first used the US monetary base as a way to predict the long-term price of gold in 2009. Now, and with QE3 underway, it estimates that the long-term price of gold should be US1,676/ounce, with the potential to reach US2,649/oz in the short term.

It also suggests the gold price would have to rise to US9,904/oz if America's official stock of gold were required to give full backing to its US2.6trn total monetary base, something the US did as recently as 1980, notes Edison.

To cover the US's net external deficit (excluding gold) of US4.4trn, the price would have to be US16,942/oz " which becomes more relevant with the change of leadership in China this month, it says.

The Federal Reserve's QE and QE2 initiatives increased the total US monetary base by over 200% since 2007, while the gold price increased from US697/oz to approximately US1,730/oz currently.

Edison says that on the assumption it will increase by US40bn per month as a result of QE3 in broadly the same way as it did for QE1 and QE2, the total US monetary base rises to US2.8trn by December and US3.3trn by December 2013.

"Given the historical relationship between the two, this implies a long-term gold price of US1,446/oz as at December 2012, US1,676/oz as at December 2013 and, if QE3 then continues, US1,906/oz as at December 2014 and US2,136/oz as at December 2015."

Edison also constructed a model company to analyse the periods in the life of a gold firm when they make the best returns.

Its conclusion was that the best period occurs during the transition from explorer to developer, usually between years 4 and 9. Good returns can also be made during the resource delineation phase (years 1 to 3), but within a potentially shorter period of time.

After that, the third best returns occur at the end of the life of the mine when working capital is unwound (in the case of a miner, typically low-grade stockpiles are processed at near-zero cost) and terminal value is realised.

The three points of potential value destruction: the initial conversion of cash into an inferred resource in Year 1; the shift from a resource to a scoping study and the final, major round of equity fund-raising.

Goldman added that the performance of Randgold Resources (LON:RRS) highlights the upside potential that can exist in the junior mining sector and in an environment where traders are willing to take more risk in their portfolios.

Over the week, gold closed higher at US1,732, though it was poutperformed by silver at US33.7 while platinum was flat at about US1,575.

 






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