Thursday, March 5, 2009

Bank of America/Merrill-Lynch Report Gives Gold Favorable Outlook

In a comprehensive 56-page report on metals investment strategies, the outlook – both short and long term – for gold is good. The report (not currently available online) credits the current economic environment for benefiting the price of gold and its investors. "Increasing inflation expectations, a shift towards liquid assets, a rapid increase in credit risk, falling stock markets, and a wave of monetary and fiscal policies are all contributing to fuel a rally in gold prices."

The report projects the average spot price to $1,000/oz for 2009 and $1,050/oz for 2010. While that may be a modest projection from the current 900s, their view is that gold prices have the potential to hit $1,500/oz – and potentially more – over a three year period. The report outlines a three stage scenario that would lead gold to that $1,500 Promised Land focused on risk, currency and a recovery of energy prices.

During a time dominated by credit risk in the investment markets, gold is free of credit risk. Because of this, gold becomes a very attractive investment during crisis. We are in the midst of the first stage.

The price of gold would benefit from currency weakness in the second stage. Weak currency leads to inflation, which drives up demand for gold.

The third stage is a recovery in energy prices. The bank bailouts in the US could result in inflation, thus pushing up the price of oil. The report details that "the combination of higher cost of money and higher input cost inflation could force oil back up to $150/bbl. As we expect gold to maintain its long-run relationship with other commodities, gold prices could well push higher to $1500/oz."

These experts are predicting an average spot price of $1,000 this year, $1,050 for 2010, and as much as – if not more than – $1,050 within the next three years. So what could go wrong for gold investors? The upside of gold would be limited if the dollar does not depreciate as expected in stage two. Likewise, "should the world economy revert to a period of peace, prosperity and price stability, gold prices could suffer." That's a "doomsday" scenario we'd all gladly accept.

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