Pundits predict good year for gold

Vancouver — The consensus among analysts during the latter half of 2002 was that lacklustre global economic growth would cap prices for base metals in 2003 but that geopolitical uncertainty and a weakening U.S. dollar might combine to push gold significantly higher.

Evidence that the global economic recovery was not materializing prompted brokerage house ABN Amro to cut its copper price forecast for 2003 by 11.4%, to US74 per lb. The main reason for the reduction is the belief that demand for the metal next year will be weaker than previously thought.

According to the ABM Amro report, other metals are suffering not just from weaker demand but from oversupply.

In the case of aluminum, the growing spread of smelters in low-cost countries, such as South Africa and Brazil, combined with existing cheap capacity in Russia, has given the cost curve a sharp downward pull. The ABN Amro team believes that only the closure of more than 1 million tonnes of high-cost capacity in the developed world can bring the market back into balance and avoid a steep change downwards in price.

A similar situation can be found in the zinc market. Analysts estimate that 60% of mine capacity is losing money at the current price.

U.S. investment bank JP Morgan concurred with the bleak outlook for base metals by pushing back its price forecasts in September.

The JP Morgan report expects industrial production to recover in late 2003, stretching into 2004 and 2005, instead of in late 2002, as forecast earlier.

“We now predict relatively steady base metal prices into 2003, with a protracted recovery from late 2003 into 2005. Short-term risks remain to the downside,” states the report.

On the issue of oversupply, JP Morgan states: “Producers now need to show further restraint by cutting production and resisting the temptation to restart idle capacity.”

The brokerage house forecasts US62 per lb. for aluminum in the new year, which is in line with predictions by Macquarie Research. Copper is expected to average US72 per lb, lead US22 per lb., and zinc US38 per lb.

However, it is not all bad news, as analysts have been steadily raising their outlook for the price of bullion.

At the end of 2001, 15 investment banks tabled their 2002 gold price forecasts, with values ranging from US$271 to US$325 per oz. Barclays Capital predicted US$271 an oz.; Deutsche Bank, Credit Suisse First Boston, Merrill Lynch and Salomon Smith Barney all envisioned US$280 per oz.; and CIBC, Mitsui Global and HSBC predicted US$300, US$315 and US$325 per oz., respectively. For 2003, these banks forecast a range of US$260 to US$325 per oz., with only CIBC issuing a forecast in excess of US$300 per oz.

Weaker global stock markets and a plunging U.S. currency during 2002 prompted most of the analysts to up their gold price targets throughout the course of the year.

In May, Barry Cooper, a gold equities analyst at CIBC in Toronto, raised his gold price forecast for 2003 to US$350 per oz. He said depreciation of the U.S. dollar is the driver for gold, pointing out that each 1% gain for the euro against the U.S. dollar will translate into a 1% gain for gold. The hypothesis is that if the euro reaches parity with the greenback, reflecting a worldwide retreat from American assets, gold will move to US$345 an ounce and gold mining stocks will surge 25% in value.

JP Morgan also upped its price forecast for the yellow metal in 2003, to US$325 from US$285 per oz.

Decisively negative on the price of bullion throughout the 1990s, Andy Smith of Mitsui Global accurately tabled an average gold price of US$315 per oz. for 2002. By September of that year, he was predicting a yearly closing gold price of US$340 per oz.

Socit Gnrale economist Stephen Briggs upped his gold forecast for 2002 to US$310 from US$280 per oz. during the year but sees a weaker market going forward and pegs the average price for 2003 at US$300 per oz. Briggs remains equally cautious about platinum and palladium prices, with predictions of US$500 and US$290 per oz., respectively.

Then in early December, the price of bullion once again threatened to break the US$330-per-oz. level.

“All the hype about a real recovery that has fueled the recent stock market rally and underpinned an otherwise overvalued dollar is simply not materializing,” says Frank Giustra, former head of mining investment bank Yorkton Securities in Toronto and current chairman of Canadian merchant banker Endeavour Financial. “The dollar is falling and will continue to fall, and if gold breaks through US$330 per ounce this go-round, we’re off to the races.”

Giustra’s words proved prophetic when, two weeks later, gold surged ahead US$30, reaching highs of US$354 per oz. This rapid rise induced pundits to re-evaluate, once again, the price of bullion going forward.

“Gold has reached a crucial pivotal point,” according to a December JP Morgan report. “It is probably going to be the most important period of any since the 1980 highs of around US$800.”

The JP Morgan team of analysts state that a sustained break of US$350 per oz. would end the correction down from the 1980 high, and that this could result in a rally towards US$430 — a level unseen since 1996.

On the technical side, London-based Redtower Research believes that the long-term charts indicate a move up to US$420 per oz. or even higher.

“From a purely technical point of view, it is a great break out,” states Redtower’s chief strategist, Gerry Celaya. “If we can sustain the move above US$340, then you have to be thinking that US$360 is vulnerable for US$380 an oz. But until we break above US$360 on a sustained basis, we would be favouring a pull back to that US$330-to-US$326-per-oz. breakout zone.”