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Gold Price Outlook

Gold has continued to set new records in the December 2010 Quarter, recently breaking through the US$1,400/ounce level.  Currently (December 8) it is trading at US$1,395/ounce, after an all time high of US$1,423.75/ounce (December 6). Overall, the gold price is up 11% in the last three months, and in the last twelve months, it is up by 24%.

Since the start of 2008 (pre-GFC), gold has stood head and shoulders above most other major asset classes, appreciating by 67% while equity markets, are still in negative territory.  Copper has challenged (up 35%) but silver has won – up by 96% since January 2008.

So how does one go about predicting the gold price from here?  In this Review, we argue it is no longer about analysing gold’s fundamentals, but more about analysing market psychology, the almost total lack of trust in most asset classes, and the predominance of a ‘crisis mentality’.  At the moment it seems that gold (and other precious metals), as safe havens, are virtually the only investment vehicles that can be trusted.

If other asset classes start to regain the market’s trust, the need for a safe haven is reduced.  In this scenario gold’s fundamentals look precarious.  That will happen in time, and we believe gold will eventually come off and re-test US$1,000/ounce. However, it is hard to bet on this happening in the short-medium term, particularly with the US dollar under renewed pressure and European sovereign debt fears threatening banking sector contagion.  So we think gold could continue to set records. Our expectation for the first half of 2011 is for gold to average US$1,450/ounce.  Eventually gold’s unique safe haven appeal will start to dissipate, our guess (and it is only a guess!) in the second half of 2011, if there is a sustained recovery in equities.

Gold Equities

As the table below indicates, the Australian gold shares have out- performed strongly over the last six months, due to corporate activity, exploration success, and relief flowing from the restructuring of the proposed ‘super profits’ tax.  This is despite the A$ gold price actually falling by 6% in this period.  The South African gold stocks have consistently underperformed – returns in physical gold have been superior to holding South African shares.  Holding Canadian gold shares has produced returns similar to that of physical gold.Gold recently set a new record of US$1,423/ounce, and is up 11% in the last three months.

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