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XMFSinchiruna (26.50)

Citigroup declares gold could double or TRIPLE! ;)



July 01, 2008 – Comments (10)

As usual, their official forecasts for average prices bear to resemblance whatsoever to the narative that accompanies them.  They list forecasts for prices to average no more than $1,000 by 2010, but then state prices could triple in the same time frame.  What gives, you ask?  I believe the major investment banks walk a tightrope between their own interest in keeping gold prices down and their eroding ability to control it.  The recognition of the doubling / tripling potential is a face-saving measure which flies squarely in the face of their stated average price forecasts.  I wonder if they realize how stupid that makes them look?  :)

Anyway, suffice to say, I would pay some attention to these narratives... we are starting to see hints of actual truth come through the major banks and through the mainstream media.  It's refreshing.  The charade simply would not play anymore... the cat's out of the bag.

Ignore the portion of their narrative dealing with gold equities... their recommendations are terrible and their statements misleading.  The miners will do just fine... just as they have in every prior gold bull market.

Citigroup says long-term gold price could double or even triple Dorothy Kosich Citigroup forecasts that "gold is likely to regain $1,000/oz by end-08 and to work higher through 2009-2010."

In their recent Gold Commodity Update, Citigroup metals analysts John H. Hill and Graham Wark also predicted that "longer term, we believe that gold is capable of doubling or tripling from current levels."

The Citi global metals forecasts have an upward bias, at $906/$950/1000 average in 2008/09/10.

The analysts said "secular and seasonal factors favor gold" during the second half of this year. "We remain positive on gold, based on macro and supply/demand factors. The forces that have propelled gold for 5 years are firmly in place."

During the second quarter of this year, gold has averaged $896/oz, up 34% from the same quarter of 2007 and down 3% from the first quarter of this year. "Following a series of downside fundamental tests gold appears to have found a floor, and quietly climbed back to $917/oz."

"Despite extensive hand-wringing, the ‘floor in the dollar' has inflicted minimal damage," the analysts noted. "We believe the drivers of the gold bull market remain intact, heading into a favorable period."

"We see gold as well-positioned heading into Autumn, when fabrication tends to heighten the market," they added.

Nevertheless, Hill and Wark warned, "It will be important for seasonal/volatility dampened fabrication demand to recover, before gold can move higher." However, they added," Longer term, we would not be surprised to see gold double from current levels as the global policy prescriptions for the credit crunch remain powerfully and uniformly re-flationary."

Meanwhile, Citicorp suggested that slow de-hedging is unlikely to result in a gold market surplus, although they said it remains a key question. "We believe that the combination of wealth creation in China, petrodollars in Russia/Mid-East, and ETF inflows is likely to absorb possible additional ‘supply' of 200-300 TPY," the analysts advised.

In the meantime, "real interest rates are still strongly negative, inherently favoring hard assets and gold," Citigroup noted.

In their analysis Citigroup found that the principal Exchange Traded Funds hold 954 tonnes of gold bullion valued at US$24 billion, down 4% from peaks during the first quarter of this year. Total volume is equivalent to about 130 days of mine supply. The analysts noted that average daily gold ETF trading value was about $900 million, "more than that of Newmont and Barrick combined."

ETF holdings are up 5% or 39 tonnes from trough levels at the end of May amid profit-taking after $1,000, according to Citigroup.

"Gold correlations are evolving," the analysts noted. "Adherent owners of gold as portfolio insurance should be delighted in recent weeks as increasingly negative is being established between gold and the S&P 500. A strong positive correlation with oil has prevailed year-to-date. The negative correlation with dollar remains a fixture."

Citigroup's analysis also revealed that "gold shares have stalled as investors have flocked to physical bullion or FRF-rich bulk/base miners."

"Disappointingly, gold equities remain near levels seen when the gold was in the low $700s," the analysts determined. "On the other hand, cash flow should be strong with gold above $900/oz.

"The move in gold has been perhaps too sharp for the equities," the analysts said. "During a financial crisis, safe haven demand favors the simplicity of bullion."

Citigroup's" buy-rated" gold picks include Barrick, Peter Hambro, Lihir, and Newmont. However, the analysts cautioned, the second quarter is "likely muted due to flat gold amid energy/input escalation."


10 Comments – Post Your Own

#1) On July 01, 2008 at 1:25 PM, lquadland10 (< 20) wrote:

Hog wash. The reason gold will tipple is telling you where the American dollar is going. In the sewer. I bought gold rings at 650.000an oz. and I am still holding. Land buys will be great in 3 years in rural parts of the country. Buy jail stocks because crime will rise.

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#2) On July 01, 2008 at 2:53 PM, XMFRosetint (45.56) wrote:

Hey TMFSinchiruna, I was wondering what you thought about the GLD ETF? I've heard some bad things about it before, but I was wondering if you thought it was a decent way to play gold if someone was interested in doing so?



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#3) On July 01, 2008 at 4:58 PM, XMFSinchiruna (26.50) wrote:


If you look through my blog, you'll see I post continuously about the dollar and its relationship to where gold is headed.  I too plan to convert my gains in gold to real estate.  I plan to take some profits at $1,650, a little more at $2,000, and let another 1/3 or so ride and try to time a top.  Real estate should feel pretty cheap when using the proceeds from such a run.


While I don't think GLD or IAU are terrible ways to gain exposure to bullion, I much prefer the Central Fund of Canada (CEF), which holds equal values of gold and silver bullion.  While I distrust whether the ETFs might lease out bullion or take paper instruments and count them as bullion, I am 100% confident that CEF engages in no such activities.  CEF is, and will remain, my single largest holding.

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#4) On July 01, 2008 at 6:16 PM, soyelpato (37.37) wrote:

sincharuna - thanks for staying the course, i raided your list for gold picks a few weeks back, catapulted me into the 90's - thanks.

dollar-euro no longer a good indication of the global economy - look for dollar-RMB or euro-RMB to take it's place.

so says uncle soy.  :)

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#5) On July 01, 2008 at 7:04 PM, XMFSinchiruna (26.50) wrote:

An observation from someone who knows gold as well as anyone, from Le Metropole Cafe

In the June 30 session on the TOCOM Goldman Sachs COVERED 504 short contracts to bring their net short position to 6,953 contracts. This is the second lowest net short position since I have been keeping records for 2 ½ years. The lowest ever was 6364 reached on 27 Dec 2007. This is clearly NOT an arbitrage position. Over 2 years the position has gradually declined from 52,000 contracts net short to just less than 7,000 against a back drop of rising gold prices. That is not a profitable proposition! The covering looks like it may pick up pace and I suspect the gold price is about to go much higher!

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#6) On July 01, 2008 at 7:31 PM, XMFSinchiruna (26.50) wrote:

METALS BUST ‘HIGHLY UNLIKELY’ BMO forecasts gold, precious metals in general to move higher this year

BMO Capital Markets Bart Melek suggests that rising food and energy inflation and the equity market are “adding luster for gold.”

Author: Dorothy Kosich
Posted:  Wednesday , 25 Jun 2008



In an equity research note published Tuesday, BMO Capital Markets projects gold and the precious metals complex in general to move higher into 2008.

BMO Global Commodity Strategist Bart Melek suggested that rising food and energy inflation and the equity market are "adding luster for gold."

He wrote that "BMO's optimism for gold and the rest of the precious metals is primarily driven by the view that inflation is start to get entrenched globally, equity markets are set for a period of volatility owning to renewed central bank hawkishness and expectations that the U.S. dollar (trade-weighted) will continue to be in a weakened state for the foreseeable future."

Melek asserts that the greenback will remain "relatively weak in trade-weighted term in order to help reverse the substantial global trade and current account imbalances," which will help the gold outlook.

"Also quite supportive of the longer-term gold outlook is the expectation of rising wealth in India, China, the Middle East and the rest of the development world-traditional buyers of gold. Jewellery sales and the use of gold and other precious metals as a store of wealth in these regions are expected to become increasingly important," he advised.

"The yellow metal is also likely to be increasingly used as protection against financial market and geopolitical instability-portfolio-driven reasons BMO currently is positive on gold," he added.

In his research, Melek also asserted that a "highly utilized mining sector and sky-high costs make a bust unlikely."

"The recent earthquakes in China; flooding in Australia and power problems in Southern Africa; strategic behaviour on the part of producers in response to lower prices and maintenance (e.g. recent NHP Billiton nickel project shutdown); rising costs and still-low inventories are projected to keep metals firm when measured against historic norms," he suggested.

"Rising cost structures, equipment and skilled labour shortages all give support to the BMO thesis that the short- and long-term metal prices are not likely to revert to historic means as long as the global demand outlook remain intact," Melek advised.

Melek forecast that global demand for many metals and bulk commodities, including copper, zinc and met coal, is expected to grow as much as 40-50% over the next decade. "Since supply is proving to have a very hard time keeping up with demand growth, metal and bulk commodity prices appear well supported over the long term," he said.

Nevertheless, BMO's research found that "concern that poor G7 economies may erode demand for metals and other commodities, the end of labor strife in Chile, rising LME supplies and production increased also helped knock metals off from their perch-a trend that will likely be extended."

"For lead, zinc and, to some extent, nickel, the expectation that the market is headed for a potential small surplus, following a period of deficits has moved markets from an ‘auction' pricing model to a ‘marginal cost' pricing model, spurring considerable short selling," according to Melek.

Nevertheless, contracts for bulk commodities such as iron ore and metal coal continue to be at record levels, owing to supply constraints and high demand, he added.

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#7) On July 01, 2008 at 7:56 PM, XMFRosetint (45.56) wrote:

Thanks for the info, TMFSinchiruna. It was really helpful. I'm gonna go ahead and favorite you because your blogs are high quality.

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#8) On July 02, 2008 at 12:45 AM, XMFSinchiruna (26.50) wrote:


Thanks so much!  Congrats on your excellent score. [Careful of those financial longs though.  :)  ]

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#9) On July 07, 2008 at 3:48 AM, mgiv (39.70) wrote:

The fact that more bank failures loom is the main reason to buy gold right now.  Also instead adjusting gold to the CPI for real prices, I believe it should be M3 adjusted.  Using an M3 deflator the price of gold looks cheap.

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#10) On July 09, 2008 at 1:55 AM, awallejr (34.72) wrote:

I simply don't see gold to hit such lofty prices any time soon. Gold really is a function of inflation more than anything and you would really need runaway infaltion for gold to double or triple during the short term. Maybe in a decade or two, but not any time soon. 

As for real estate, buy it now while the prices are dropping.  Land is pretty much FINITE (discounting volcanic expansion or coastal flooding as a result of sea rising).

Countries go to war over land, they don't over gold ;p (excluding black gold of course).

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