RENO--(Mineweb.com) In a January 30th sector report, the Parisian international security broker Credit Agricole Cheuvreux raised its mid-cycle gold price estimate from $750/oz to $900/oz, suggesting the possibility gold could climb to $2,000 an ounce and higher.
Meanwhile, London-based Cheuvreux Investment Analyst Paul Mylchreest rated Anglo American as "Outperform," and increased its stock target price 15.9%. However, he warned, "Anglo American is vulnerable to takeover with its financial performance lagging that of its peers and management reversing the diversification strategy of recent years."
Anglo American was given a positive rating by Cheuvreux because of its unique exposure to the precious metals and diamonds sectors among the large European-based miners; the restructuring program scheduled during this year; a more aggressive policy on returning surplus capital to shareholders; and its vulnerability to takeover.
Mylchreest claimed that "covert selling (via central bank lending) of gold has artificially depressed the price for about a decade, but Bank for International Settlements' data on gold derivatives suggests its impact in on the wan. ...Our $900/oz mid-cycle estimate takes into account the long-term average ratios between the gold price and the prices of oil and the Dow Jones Industrial average."
Mylchreest declared that "we also see the possibility of a spike to $2,000 or higher, if the story on diminished central bank gold reserves becomes widely accepted, if central banks in countries with large US dollar holdings compete to buy gold and diversify forex reserves away from dollars, and if the U.S. economy slides into either high rates of inflation or deflation."
He estimated that central banks have loaned out between a third and a half of their reported gold reserves or 10,000-15,000 tonnes of gold. The short position between the central bank and the billion bank "is the foundation for the gold derivatives market which grew rapidly in the 1990s and currently has a notional value of c.USD300bn. Non-gold producers account for the majority of the short position and may not be able to cover their shorts without causing a spike in the gold price," Mylchreest suggested.
Meanwhile, Mylchreest asserted that "despite official denials, there is much evidence to back the gold price suppression claims" made by the Gold Anti-Trust Action Committee (GATA), adding that "support for GATA has come from senior Russians officials."
"We estimated that there is a substantial supply deficit in the gold market of around 1,300 tonnes p.a. before any central bank selling and perhaps 700 tonnes p.a. after the publicly announced sales, but before covert selling," Mylchreest said. "This compared with world gold mine output of only 2,500 p.a."
Any quick fix to this deficit is not possible since central bank gold reserves are finite and the lead time on new mining projects is seven to 10 years, he asserted. Meanwhile, Mylchreest suggested "there is no way that the market can accommodate renewed buying by central banks like Russia."
Mylchreest said the gold price acts as a early warning of potential crisis, such as rising inflationary/deflationary pressures and general confidence in paper currency, particularly the U.S. dollar. "The U.S. economy will walk a fine line between inflation (possibly hyperinflation) and a deflationary slump in the next few years. In the short term, we see further reinflation with continuing asset inflation as slightly more likely," he suggested. "Even if the U.S. economy somehow muddles through, the short position in gold, central bank buying and low real yields will support the gold price."
"Gold and precious metals are the only asset class that should perform well in either an inflationary or deflationary scenario," Mylchreest declared.
Mylchreest predicted that "gold and gold mining stocks are posed for an unprecedented rise in prices and profile. Investors in European and UK equities need to assess the implications for their portfolios." Nevertheless, he added, the combined market capitalization of the 10 largest gold stocks on world stock markets is equivalent to only 30% and 40% of the market capitalizations of GE and BP respectively.
