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Citigroup says gold will benefit from both monetization and muddle-through and doom & gold scenarios

Author: Dorothy Kosich
Posted: Tuesday , 07 Oct 2008
The optimism generated by the U.S. financial bailout and a sounder U.S. dollar may mute gold prices in the near term, but Citigroup analysts expected to gold to work its way higher through 2009/10 with average forecasts of $950/1000 per ounce.
Citigroup North American metals analyst John H. Hill continues to see copper "as well-positioned due to supply-side constraints, which span shortfalls at current mines, delays at mega-projects, and contract cancellations by governments."
In an analysis published Sunday, Hill noted, "Gold is being tugged in opposite directions by potent new investment demand, and uniformly dour sentiment for industrial metals amid dis-inflationary datapoints and a firmer dollar. These negatives may come into sharper focus after passage of the U.S. financial bailout but will likely prove ephemeral."
"We see gold as mispriced and a beneficiary in either the ‘Monetization and Muddle-Through' or ‘Gloom & Doom' scenarios. Physical off-take remains brisk, while central banks sales and mine output are running light," he added.
While the past three months are not easy for gold miners, with gold prices falling to an average of $865/lb on energy and other cost pressures. "In recent weeks gold has turned higher on powerful new investment demand amid the deepening credit crisis, while the U.S. dollar has firmed-both positive for the miners," Hill advised.
"We see gold as badly mispriced, and see positive prospects based on a mix of macro and supply-demand drivers," he said.
Nevertheless, Hill asserted that forces "that have propelled gold for the past 5 years are firmly in place, and policy prescriptions for the credit crisis are firmly in place, and policy prescriptions for the credit crisis seem powerfully and uniformly re-flationary."
Should the U.S. lapse into deep recession with spillover to BRIC countries, Citigroup suggests that "gold and precious metals would prove to be one of the few safe heavens for capital preservation particularly given likely low to negative real interest rate in this scenario. In this case we would expect gold to double or triple from current level."
However, Hill also advised that gold stocks have not benefitted from the recent rise on gold bullion and gold coin sales. "Our composite of gold stocks is a mere 1.2% above Sept. 9 lows, and is down a painful [negative]-34.2% YTD," he noted. "Performance is similar for the HUI index which is at -35% YTD."
Citigroup cut its copper forecast to $3.65/$4 per lb in 2009-10, which impacts Barrick and Newmont. Citigroup lowered its target for Barrick from $55 to $45 and from $65 to $50 for Newmont.