Citigroup boosts 2008-10 gold forecasts to $900-1000/oz (Source: Mineweb)

Based on a mixture of macro and demand drivers that have already propelled gold prices and are intensifying, Citigroup raised its gold price forecasts for 2008-10, including a test of $1,000/oz.

Author: Dorothy Kosich
Posted: Wednesday , 06 Feb 2008


Citigroup has raised its gold price forecasts by 20% to $900 - $950 - $1,000 ounce for 2008 to 2010-slightly below spot prices and the futures curve--and raised its earning per share estimates for Newmont and Barrick.

Citigroup metals analysts John H. Hill and Graham Wark said they expected a test of the $1,000/oz.

In an analysis published Monday, Citigroup raised EPS estimates for Barrick and Newmont, based on higher gold prices and an estimated $3.50/lb copper price in 2009. While current year Citigroup's EPS estimates for Barrick remain at $1.88 and $1.48 for Newmont, Citigroup raised its 2009 EPS estimate from $2.45 to $2.71 for Barrick and from $2.02 to $2.56 for Newmont.

Despite the strong gold price, the analysts asserted that "from the equity perspective, gold has arguably come too fast, too fast. We do not believe that the equities discount anything close to current gold prices, or the futures curve."

In their analysis Hill and Wark said, "We believe gold has entered a new investment-driven phase, amid a much more hospitable macro environment. While gold prices have been rising since 2002, this was largely due to the pull from pro-cyclical basic materials and oil in a benign of unbalanced macro environment. Now, with discourse dominated by credit crisis, derivatives dislocations, currency debasement, inflation, and self-reinforcing financial negatives threatening U.S. recession and synchronous global slowdown, gold is entering friendly territory."

Noting that scrap flows and physical selling pressure have been light, hill and Wark suggested that "Asian markets are becoming acclimated, and that much of the available scrap was flushed out in 2003-06."

Citigroup is not making an effort to "predict the highs/lows, or short term trajectory given the macro overlay. Corrections are expected along the way, and buying on weakness is recommended-which seems to be the central lesson of the past five years."

Nevertheless, Citigroup declared that "an extremely hospitable macro environment" exists for gold "and believe the ongoing investment-driven demand phase will continue for gold, particularly as the broader investor base is not yet fully involved."

The analysts identified several key factors to watch in gold commodity data and the company reporting cycle including:

1) The pace of scrap selling in response to the gold rally, which should continue in the 1,000 tpy range;

2) Eastern physical investment in coins/bars versus Western investment in electronic/paper gold;

3) Central Bank selling, which is running close to the 500 tpy CBGA II quota and has been somewhat marginalized as a price driver;

4) Mining company de-hedging, with the two remaining major hedgebook owners possibly taking action; and

5) A wave of new mining taxes, royalties, asset expropriations, and project delays related to ‘competing claims for cash flow.'

Citigroup's analysis suggested that central bank sales are likely to undershoot quotas in 2008 and 2009. "We believe the likelihood of IMF sales are low," Hill and Wark said.

The analysts said they expect gold company de-hedging to continue, "particularly from the two major companies that hold over half the remaining contracts. We would not be surprised if significant new de-hedging was revealed during the 4Q reporting cycle. Yet, the pace of de-hedging is likely to slow given smaller aggregate positions. This will modestly increase available physical supply.' They noted that de-hedging has routed 300 to 400 tpy gold from gold mines, back into central bank vaults. "This is good for the gold price, but is reaching natural limits."

Citigroup estimated that principal gold ETF holdings are at record levels of 845 tonnes, worth over $25 billion.

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