BMO's bull case for gold could reach a peak price of $1,500/oz

BMO Capital Markets Global Strategist Bart Melek said there are "plenty of reasons to hold gold" with "considerable upside possible."

Author: Dorothy Kosich
Posted: Thursday , 17 Dec 2009

RENO, NV -

In an analysis published Wednesday, Melek said the bull case for gold could reach a peak annual price of US$1,500 per ounce.

Meanwhile, Melek forecasts that silver and PGMs should outperform gold "because demand for these materials will grow as investors buy them to hedge against the U.S. dollar and inflation (like gold); as jewellery demand recovers and as producers use them in manufacturing. Supplies are unlikely to grow much in the short term due to production cuts on the mine side and a relatively high currency in producing countries."

In their analysis, BMO found base and precious metals did extremely well this year. Lead increased 180%, copper is up 150%, zinc jumped 132% and nickel is up 80%. Canadian metals stocks were up 440% while gold jumped about 70%, silver surged to 115% and platinum was up 95%.

BMO suggests commodity markets will remain "quite firm as long as demand prospects keep improving, especially in the United States. However, it is unlikely that prices will rally aggressively over present levels."

In fact, Melek advised there could be "a bit of a correction in the short run in some commodities such s copper, zinc and aluminum."

Rising inventories for some metals, less aggressive Chinese metal imports, a recent jump in the U.S. dollar and an end to mining work stoppage concerns could be catalysts for a near term modest correction, he suggested.

PLENTY OF REASONS TO HOLD GOLD

In his analysis, Melek noted gold surged to a new record recently and remains near historic highs. The 200-tonne purchase of IMF gold by India's Central Bank "removed the albatross from around the neck of the gold market," he observed. "Investors no longer fear the IMF selling 400 tonnes of gold to the same extent as before the Indian purchase."

Longer term, BMO Research expects "gold to do well, with considerable upside risk and a possible gold price of well over US$1,3000/oz under our ‘bull case' scenario in 2010."

"The yellow metal will likely be kept firm into 2010 and 2011 by a weak greenback, sky-high fiscal deficits, rising inflation concerns and higher jewellery demand, which have been hit hard by the recession."

Meanwhile the fact that there is virtually no hedging activity among gold producers and that central bankers have greatly limited gold sales and become net buyers recently makes BMO Research "quite comfortable with the view that gold prices will average $1,050/oz and $1,100/oz in 2010 and 2011, respectively."

BMO Research suggested gold "will likely be energized again later in 2010 amid a week greenback and rising inflation concerns as clarity develops surrounding global economic prospects and as the U.S. economic recovery takes root."

"Longer term, gold's seven-year run is expected to continue well in 2011," Melek predicted.

The possible partial monetization of massive U.S. debt sitting in forex reserves around the world and of the huge amounts of bad debt sitting on American banks' balance sheets should also prompt investors to buy gold as protection.

Another factor expected to help gold prices is physical demand from consumers in developing countries as disposable incomes increase, "fueling gold purchases as a store of value and status system," BMO said.

Meanwhile, BMO Research noted central banks have already started to put more gold in their reserves to protect against inflation and the depreciation of the U.S. dollar. "The Indian, Russian and Chinese central banks have already stated that they are looking to diversify their reserves and that gold will play a part. Total aggregate official gold holdings have started to increase in the last few months after many years of aggressive sales."