On Tuesday, gold price rose to fresh 18-month high above $1,008 per ounce, but eventually reversed course to settle with a fractional gain at $999.5. Pedro de Norohna, managing partner at Noster Capital argues that adjusted for inflation gold should be trading at $1600. Bullish on gold, his firm raised exposure to gold derivatives recently. Leaving aside the case of self-fulfilling prophecy, do you think the bull is strong enough to drive gold to $1600?
Gold as an asset class was never and probably will never be a perfect hedge against inflation. Thanks to market imperfections and fiat economy. Of course, central banks and national governments seem to be increasingly driving up the gold demand. In Q2'09, the central banks made net purchases of 14 tones of gold, compared to net sales of 69 tones in Q2 of 2008. On August 7, 2009, 19 central banks in Europe renewed their ‘Central Bank Gold Agreement' lifting gold prices up. However, if gold has to reach $1600 by the end of 2009, then the central banks need to raise their purchases in a coordinated fashion and that too by several magnitudes which seems like a very remote possibility. This effectively means that $1600 by the end of 2009 is ruled out. However, this doesn't mean that the bull case is weak.
On Tuesday, Barrick Gold Corporation (NYSE:ABX), the largest pure gold mining company in the world, signed an agreement with a syndicate of underwriters, led by RBC Capital Markets, Morgan Stanley & Co., J.P. Morgan Securities Inc. and Scotia Capital Inc., to raise $3 billion to participate in the booming gold market. On Wednesday, Barrick Gold Corporation raised that to $3.5 billion with an option to increase it to $4 billion in total. Barrick is raising funds to eliminate fixed-price contracts after eight years of successive gold-price increases. As of Sept. 7, the company had contracts for 9.5 million ounces of gold and will take a $5.6 billion charge in the third quarter to eliminate some of the hedges.
Inflationary concerns, tied to economic recovery and high government debt continue to drive up investment demand for gold. The current $1000 mark level follows a sustained rise in price over the past eight years. And, so the $1000 mark is no longer the watershed for gold that it was once. Gold is likely to set new resistance and support levels in 2009. How far will the floor and ceiling be raised is the central question.
Pedro de Norohna says that the fundamentals are in place for gold to reach $1200 by end 2009 if it breaks last year's high. And from thereon, he believes, the journey to $1400 would be even shorter. To, me this seems too optimistic to become a reality. Looking at the gold futures on NYMEX, I believe gold is likely to touch $1030 by end 2009 in normal scenario and $1060 in optimistic scenario. If investment demand for gold reaches asset bubble level then gold may reach $1100. Rising gold prices should help Barrick Gold, Gold Corp (NYSE: GG), Newmont Mining (NYSE: NEM), Kinross Gold (NYSE: KGC), and Yamana Gold (NYSE: AUY) to register handsome gains on the bourse.
