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Fat Prophets on prediction for gold 2013 (14/2) 6. Record highs in gold, China leads many of central banks around the world in aggressive buying of gold bullion on the open market. The public also begins to step up as the price accelerates though $2000 for the first time. Gold producers outperform the wider indices and the resource sector. Gold range $2300/$2500 We expect quantitative easing will remain the predominant central bank theme around the world in 2013, with consequent downward pressure on the major currencies. As the US Federal Reserve maintains the mantra of ‘lower interest rates for longer’, echoed by many other countries, investors will see gold as the countermeasure. As the holiday gift giving season approaches in China, demand for jewellery will recover from a recent soft patch. The country’s new political leadership team is also likely to spur renewed confidence for investment in gold bars and coins. Perhaps just as ominous are China’s enormous foreign exchange reserves, mostly held in US dollars. At US$3.3 trillion as at the third quarter of 2012, China will not be pleased that the value of its reserves could deteriorate thanks to the concerted efforts of the US central bank to devalue its own currency. The irony of the situation is rich indeed after China used its own undervalued currency to gorge itself on US dollar assets earned through its exports. We expect China to aggressively accumulate and build its gold reserves in 2013, and will inevitably surpass the US as the largest holder of bullion in the world, with the principle objective of one day restoring gold conversion to the reminbi. This would almost certainly see the US dollar’s reserve status challenged and also the “official” remonetisation of gold within the global financial system. The People’s Bank of China will not be the only central bank stocking up on the precious metal as a means of currency diversification. According to the World Gold Council, China’s reported official gold holdings at 1,054 tonnes represent just 2% of its total reserves. That compares with 8,133 tonnes and 77% for the US. The World Gold Council concluded that: “Diversification of reserve assets remains the driving force behind gold demand by central banks… Official sector demand is likely to act as a fairly solid pillar of demand going forward.” We see no change to the easy monetary policy of many of the major central banks which strongly suggests gold will continue its ascent towards US$2,000 per ounce and beyond. The conditions are set for the gold price to surge beyond that marker and we see it trading in a range between US$2,300/oz and US$2,500/oz. Part of the revival will be a big recovery in the shares of major gold mining companies that have underperformed throughout 2012. Some of the underperformance has been self-inflicted but few of the major producers have hedged sales and most have substantial world class deposits that underpin higher valuations.