Hello Precious, Citgroup says

In a research report entitled “Hello Precious” — analysts at Citi Investment Research and Analysis argue that the precious metal space offers “good valuation potential as well as headline commodity upside.”

That’s hardly news to many in the mining industry and you’d probably be hard-pressed to find anyone who doubts gold can be a good safe haven in uncertain markets, but the authors do serve up some interesting statistics.

Over the past four earnings recessions in the United States, for instance, the gold price has outperformed the S&P 500 index by 18%. That percentage falls to a still very respectable 15% “in a true economic recession.”

Historically gold is also the most active sub-sector of mergers and acquisition deals in the mining sector. Over the last ten years, M&A deals involving gold companies reached US$115 billion, more than 50% higher than the next commodity subsector, which was coal, with a deal value of about US$83 billion, the authors say. (The third- and fourth-largest subsectors were copper with US$60 billion worth of deals and iron ore with US$32 billion.)

It’s an M&A trend that is likely to continue, given high gold prices, “slowing reserve addition of the majors and a growing mid-tier producing space,” the authors write in their Apr. 11 research report.

In terms of high gold prices, worries about how Greece plans to service its massive debt and the volatile economic recovery in the U.S. pushed gold prices up yet again last week. COMEX gold for June delivery jumped US$35.80 per oz. last week (Apr. 5-9) to settle at $1,161.90/oz., a new high for the year.

While the key bull arguments favoring gold are a weak U.S. dollar and anxiety over inflation, what is new, the analysts write, “is the re-emergence of asset price inflation and negative real rates in China.”

“We view China as the most important source of future demand growth,” they argue, adding that last year gold demand increased by 10% with “particularly strong retail investment demand.”

Other important factors that will sustain high gold prices include reduced selling by central banks and continued de-hedging by producers

“Central banks may actually become net buyers in the next two to three years,” the analysts write. “China and Indian central banks remain underweight gold with only 1.5% and 4.1% of total reserves in gold, (versus the Euro Area average of 54%).”