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.
John H. Hill, CFA
Analyst, Metals & Mining
Citi Investment Research
415-951-1714; 1813 fax
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