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Experts Say...

Citigroup Research - Gold Commodity Update - June 26, 2008

Inflation & Fabrication Outlook Favor Gold

  • Physical offtake sets a floor Gold has weathered a series of thematic negatives related to the end of the Fed rate-cutting cycle and a "floor in the Dollar," with minimal damage.  Macro catalysts have rotated from credit concerns, to currencies, to intensifying inflationary pressures worldwide.
  • Recalling the events of 2006 During the late-07 rally, Gold benefited from the confluence of record investment demand and strong seasonal fabrication off-take.  In recent months, both of these forces have been working against Gold.  The pattern is nearly identical to mid-06, with less concern over demand destruction.
  • China + Russia:  Wealth effect overpowers price elasticity Bucking the trend in price-sensitive "mature" Indian/Asian gold markets, fabrication rose in China and Russia during 4Q/07 1Q/08.  Jewelry was up +7% YoY in China, making it world #1.  Russia was up +9%.  We see wealth creation in Asia and petro-dollar flows in the Mid-East as secular drivers amid a supply-constrained Gold market.
  • Secular and seasonal factors favor Gold in 2H/08 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.  We see Gold as well-positioned heading into Autumn, when fabrication tends to tighten the market.  Gold is likely to regain $1,000/oz by end-08 and to work higher through 2009-10.  Longer term, we believe Gold is capable of doubling or tripling from current levels.
  • Favorite names Buy-rated Golds are Barrick, Peter Hambro, Lihir, and Newmont.  Yet, 2Q likely muted due to flat Gold amid energy/input escalation.

Best Regards,
JHH
John H. Hill, CFA
Analyst, Metals & Mining
Citi Investment Research
415-951-1714; 1813 fax
415-572-6409 mobile
[email protected]

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